| "I just want to say one word to you…just one | | | | another strong earnings report. |
| word. Are you listening? Plastics...There's a great | | | | The Zacks #1 Rank stock trades at a reasonable |
| future in Plastics." – Mr. McGuire to Ben | | | | 17x fiscal 2010 EPS estimates and 15x fiscal 2011 |
| Braddock in The Graduate | | | | EPS estimates. |
| The Graduate was released in 1967, but Mr. | | | | PPG Industries (PPG) |
| McGuire's advice about plastics would make for | | | | The PPG Industries plastics company |
| some pretty good stock ideas in 2010. | | | | manufactures and supplies protective and |
| Plastics | | | | decorative coatings. PPG's plastics products are |
| Plastics play an influential part in our daily lives | | | | used in automotive and commercial transport |
| thanks to their flexibility and low costs. Plastics are | | | | repair and refurbishing, specialty coatings for signs, |
| used in everything from car parts to doll parts; | | | | and sealants, coatings and technical cleaners for |
| from soft drink bottles to refrigerators; our | | | | commercial and military aircraft. |
| homes, cars, televisions, mobile phones; and | | | | PPG reported strong first-quarter results on April |
| countless other products that we use on a daily | | | | 15. It had sales of $3.1 billion, up 12% versus the |
| basis. | | | | prior year's first quarter. PPG had earnings of |
| Specialty chemical companies that manufacture | | | | $0.70 per share, topping the Zacks Consensus by |
| plastics such as acrylics, polymers and resins are | | | | 7 cents, or 11.1%. For the last five quarters, PPG |
| closely linked to the global economy. When the | | | | has beaten the Zacks Consensus by an average |
| economy is expanding, these companies are | | | | of 22.0%. |
| growing. Conversely, if economic growth slows, | | | | The plastics company indicated that profit margins |
| these firms are some of the first to see sales | | | | in its industrial coatings business have returned to |
| decline. | | | | levels not seen since before the economic |
| Global Economic Recovery | | | | downturn. |
| During the recession, industrial firms reduced their | | | | After the PPG company's strong Q1 earnings |
| plastics orders to levels that matched demand. | | | | report, analysts increased their estimates for |
| They also reduced the amount of plastics | | | | 2010 and 2011. Since that report, the Zacks |
| inventory on hand to help reduce costs. When | | | | Consensus Estimate for 2010 is up 24 cents, or |
| economic conditions began to stabilize and finally | | | | 6.2%, to $4.13, and the 2011 Zacks Consensus |
| improve, those firms ramped up plastics orders to | | | | Estimate is up 17 cents, or 3.9%, to $4.59. |
| specialty chemical companies. | | | | PPG Industries is a Zacks #2 Rank stock. It is |
| The economic recovery remains underway, and | | | | trading 17x 2010 EPS estimates and 16x 2011 EPS |
| industrial markets around the globe continue to | | | | estimates. |
| experience strong demand. This continued | | | | Stepan Company (SCL) |
| economic growth will lead to even more specialty | | | | Stepan Company produces and sells specialty and |
| chemical orders from autos, construction and | | | | intermediate chemicals. The company operates in |
| technology, and plastics companies will continue to | | | | three segments: Surfactants, Polymers and |
| experience solid top-line growth. | | | | Specialty Products. Its products can be found in |
| Operating Leverage | | | | industrial cleaning products, lubricating materials and |
| Due to their economically-sensitive business | | | | construction materials. |
| models, specialty chemical companies were hit | | | | On April 20, Stepan Company reported solid |
| hard during the economic downturn. In response, | | | | first-quarter results. Net sales were up 5.9% with |
| the entire plastics industry underwent immense | | | | an 8% increase in sales volume. The company |
| cost-cutting efforts to deal with large revenue | | | | reported earnings per share of $1.76, easily |
| losses. When conditions finally stabilized, many of | | | | beating the Zacks Consensus by $1.32, or 33.3%. |
| these same plastics companies found themselves | | | | The company has beaten consensus estimates in |
| with vastly improved cost structures. More | | | | four of the last five quarters. In those earnings |
| notably, the leaner operations are enabling these | | | | beats, SCL beat the consensus by an average of |
| specialty chemical companies to generate | | | | 69.1%. |
| substantial operating leverage. | | | | Stepan Company's strong first-quarter results |
| In other words, sales are growing at a quicker | | | | prompted analysts to boost their estimates for |
| rate than operating expenses. This results in | | | | the next two years. In the last week, the Zacks |
| higher profit margins and robust earnings growth. | | | | Consensus Estimate for 2010 jumped 53 cents, |
| And with global economic activity gaining steam, | | | | or 12.2%, to $4.86. The Zacks Consensus |
| specialty chemical companies should continue to | | | | Estimate for 2011 also climbed 46 cents, 9.9%, to |
| enjoy strong top-line growth and even stronger | | | | $5.12. |
| bottom-line growth. | | | | This Zacks #1 Rank stock trades at 16x |
| How to Profit from Plastics Stocks | | | | consensus estimates for 2010 and 15x consensus |
| We looked for specialty chemical companies that | | | | estimates for 2011. |
| manufacture plastics with a Zacks Rank of #1 or | | | | Westlake Chemical Corp. (WLK) |
| #2 and are positioned to continue beating analyst | | | | Westlake Chemical manufactures and markets |
| estimates for the next few quarters. Below are | | | | basic chemicals, vinyls, polymers and fabricated |
| four plastics stocks that we think could have | | | | products. It operates in two segments, Olefins |
| great future in plastics. | | | | and Vinyls. |
| Ashland Inc. (ASH) | | | | The company reported fourth-quarter results on |
| Ashland Inc. operates as an international specialty | | | | February 23. Sales increased 5.5% to $630.0 |
| chemicals company. This plastics company has | | | | million. It also reported EPS of $0.19, matching the |
| five operating segments including Ashland | | | | Zacks Consensus. In the previous three quarters, |
| Distribution, which distributes chemicals, plastics | | | | Westlake beat the Zacks Consensus by an |
| and composite raw materials. | | | | average of 76.5%. The company is scheduled to |
| The Ashland company implemented cost-cutting | | | | report first-quarter results on May 4. |
| initiatives to combat the economic downturn. | | | | Even though the company hasn't reported |
| Those cost cuts appear to be sustainable. | | | | earnings in about two months, analysts have been |
| Meanwhile, this plastics company is now | | | | lifting their earnings estimates. In the last 30 days, |
| experiencing improving demand in its end markets. | | | | the Zacks Consensus for 2010 is higher by 15 |
| In the last 30 days, there have been eleven | | | | cents, or 15.0%, to $1.15, while the Zacks |
| upward estimate revisions versus three | | | | Consensus is up 11 cents, or 9.1%, $1.32. |
| downward revisions. The 2010 Zacks Consensus | | | | Interestingly, WLK shares are up about 74% in |
| Estimate is up 8 cents, or 2.1%, to $3.82, while | | | | the last year, but analysts covering the company |
| the 2011 Zacks Consensus Estimate is up 13 | | | | are not bullish on the stock. There are 7 analysts |
| cents, or 3.2%, to $4.23. | | | | covering WLK. There is 1 Strong Buy rating, 4 |
| Ashland is scheduled to report second-quarter | | | | Hold ratings, and 2 Strong Sell ratings. The lack of |
| results on April 27. Given its recent track record | | | | optimism among the analysts suggests that EPS |
| -- it has beaten the Zacks Consensus Estimate | | | | estimates for WLK may be too pessimistic, |
| for the last five quarters by an average of 38.1% | | | | making it easier for the company to beat |
| -- the company should be in a position to deliver | | | | expectations. |