Commodity Chemicals – Setting Up For Disappointment
26 of the 30 companies in our Chemicals index have announced Q4 earnings thus far, with only ROC, ECL, AXLL, and WLK left to report. On average, revenue growth has been positive, and all subsectors save Ag Chem show year on year gains.
Commodity Chemical stocks have notably been the strongest, growing revenues by 8.8% over 2012 levels. The apparent momentum in the Commodity group is also reflected in 2014 EPS estimates, as this has been the only Chemicals subsector to see upward revisions year to date. Revisions have been largely driving performance in 2014, particularly so in recent weeks.
We repeat a chart from our recent monthly Chemicals report, plotting performance against revisions over the past month.
To the extent that revisions have been driving performance and given the apparent disconnect between rising estimates and rising natural gas prices (a topic we have discussed in detail lately) we reiterate our concerns for Commodity Chemicals in Q1. As natural gas prices are rising, the very poor weather is certain to put a meaningful dent in US Q1 demand and overall GDP. Consequently we feel that commodity companies could get hit on the cost and demand front. While there would likely be some demand rebound in Q2, if natural gas inventories continue to trend well below normal, prices could stay inflated to encourage enough production to rebuild inventories through Q2, keeping upward pressure on costs.
Late Q4 reporters AXLL and WLK should provide some data points on the operating environment thus far in Q1. Ahead of its upcoming earnings release on Thursday, WLK announced a two for one stock split and boosted its dividend, possible conciliatory gestures to offset a lackluster outlook. We remain most concerned with WLK and LYB as valuations are full and estimates are healthy – DOW is on the expensive side as well, but our current concerns here go beyond the company’s Commodity businesses.