Chemicals:Q3(September Quarter)2017Earnings Preview

作者: 必赢娱乐官方网站  发布:2019-09-26

    Hurricane Harvey, which made landfall on August 25, cast a long shadow overUS chemicals in Q3. Due to the hurricane and its aftermath many US chemicalcompanies experienced negative impacts from shuttered plants, lostproduction, tight raw material supply conditions, higher distribution andlogistics costs and supply chain disruptions. As a result no less than a dozenUS chemical companies preannounced earnings shortfalls or talked downnumbers for the quarter. The good news is that underlying demand ex Harveyremained solid in Q3 and Q4 should see benefits from the hurricane in the formof price increases, restocking and rebuilding. Top picks: DWDP, EMN, ASH.

    Differentiated / specialty chemical companies forecast to post 10% EPS growth

    In Q2, we expect Specialty and Differentiated Chemical companies to post 4% YoYEPS growth driven by solid demand, flat-to-slightly higher feedstock costs, costreductions and share buybacks. We expect ethylene producers to post YoY lowergrowth due to lower oil prices partially offset by buybacks and growth projects.

    Differentiated / specialty chemical companies forecast to post 10% EPS growth.

    DowDuPont: With the September 1merger of Dow and DuPont the 2iconic USchemical companies have become one – at least for the next 18months. Thereafterthey will split into 3companies. We believe this 3way separation will drivesubstantial value creation thru enhanced focus, strong free cash flow and portfoliooptionality. Ex hurricane impacts, we expect Q3to show further improvement onthe strength of cost reductions. Ashland: If Ashland is successful in validating ASI(80% of ‘18E EBITDA) is a high margin, high quality specialty chemical business,we believe its 1-2EBITDA point discount to peers will close (1EBITDA pt =$10/shr). And if it cannot, we believe downside is limited as Ashland is an attractiveasset in a consolidating industry. Eastman: The company’s recent announcementthat excluding the impact of the Kingsport fire ’17EPS would be at the high end ofits 10-12% EPS guidance range was a critical step in restoring investor confidencein the ability of management to deliver on its expectations. If Eastman can deliver ina similar fashion in ’18, we believe its P/E multiple will expand by 1-2pts.

    US contract ethylene margins expanded 1.9 c/lb in Q2 vs Q1 to 20.3 c/lb on highercontract prices (up 1.1 c/lb QoQ to 31.9 c/lb) and lower production costs (down 0.8c/lb QoQ in Q2 to 11.7 c/lb, down 2% YoY). Meanwhile, polyethylene (PE) pricesrose $0.02/lb in Q2 vs Q1 due to a combination of steady demand, low inventories,and outages, which kept PE prices flat in June (vs a 3 c/lb decline in May). Startingin Q3, we expect US ethylene chain margins to weaken due to a limited number ofethylene outages (from April through August, just 2.7% of US ethylene capacity isscheduled to be offline vs. 7.3% a year ago) and new ethylene / PE capacity.

    Top Picks: DowDuPont, Ashland Global and Eastman.

    Global GDP growth is expected to accelerate from 3.1% in ’16to 3.6% in ’17

    Dow/DuPont: We expect both Dow and DuPont to post in-line Q2 results driven bysolid ethylene chain fundamentals and Dow Corning synergies at Dow, andaggressive cost reductions and solid demand at DuPont. Notwithstanding the EU’sextended deadline (of Jul-28) to rule on DuPont’s transaction with FMC, which webelieve will drive merger close towards Sept 1, we are maintaining our Buy ratingon Dow as we believe there is significant portfolio optionality given DowDuPont’seventual separation into 3 (or more) focused and properly capitalized companies.

    US contract ethylene margins compressed 3.7 c/lb in Q3 to 14.8 c/lb on flat prices(at 31.9 c/lb) and higher production costs (up 3.7 c/lb to 16.4 c/lb and up 34% YoY).

    DB’s economics team forecasts US GDP growth slowed to 2.0% in Q3from 3.1% inQ2. For Q4, US GDP growth is forecast to accelerate to 3.1% as most of the lostoutput and delayed purchases in Q3due to hurricane related disruptions areexpected to be made up in Q4. In Europe, DB’s economics team forecasts Q3GDPgrowth of 0.6% QoQ. For Q4, Europe GDP growth is forecast to slow slightly to0.5% QoQ. China’s GDP growth slowed to to 6.6% in Q3from 6.9% in Q2. For ’17DB’s economics team forecasts US GDP growth of 2.4% (vs 1.8% in ’16), EuropeGDP growth of 2.2% (vs 1.8% in ’16), China GDP growth of 6.7% (vs 6.7% in ’16)and global GDP growth of 3.7% (vs 3.1% in ’16).

    Ethylene chain margins expand in Q2.

Hurricane headwinds in Q3 should become tailwinds in Q4.Top Pick: DWDP.

Hurricane headwinds in Q3should become tailwinds in Q4.Top Pick: DWDP

    Ashland: We expect FQ3 results to be positive on solid volumes in ASI (4% volumegrowth in FQ2 and 6% growth in FQ1, following 6 quarters of flat to down volumes)coupled with price increases, which are expected to fully offset transitory issues ofhigher raw material costs and adverse FX by 2H’17. Eastman: We expect in-line Q2results and a reiteration of full year guidance as demand trends have been stablesince Q1 and selling price increases are catching up to higher raw material costs.

    DowDuPont: With the September 1 merger of Dow and DuPont the 2 iconic USchemical companies have become one – at least for the next 18 months. Thereafterthey will split into 3 companies. We believe this 3 way separation will drivesubstantial value creation thru enhanced focus, strong free cash flow and portfoliooptionality. Ex hurricane impacts, we expect Q3 to show further improvement onthe strength of cost reductions. Ashland: If Ashland is successful in validating ASI(80% of ‘18E EBITDA) is a high margin, high quality specialty chemical business,we believe its 1-2 EBITDA point discount to peers will close (1 EBITDA pt =$10/shr). And if it cannot, we believe downside is limited as Ashland is an attractiveasset in a consolidating industry. Eastman: The company’s recent announcementthat excluding the impact of the Kingsport fire ’17 EPS would be at the high end ofits 10-12% EPS guidance range was a critical step in restoring investor confidencein the ability of management to deliver on its expectations. If Eastman can deliver ina similar fashion in ’18, we believe its P/E multiple will expand by 1-2 pts.

    Ethylene chain margins compress in Q3

    We expect US chemicals to report positive June quarter results driven by i)healthy demand in the US, Europe and Asia. While there were areas ofweakness in the quarter, most notably auto OEM demand, this was more thanoffset by solid consumer demand (highlighted by strong US polyethylenedemand in June) and broad-based manufacturing growth and ii)implementation of price increases to offset higher raw material costs. Onguidance, we expect US chemical companies to be positive as demand trendsare expected to stay healthy, price increase are fully implemented and rawmaterial costs begin to decline. Our top picks are Dow / DuPont and Ashland.

    Global GDP growth is expected to accelerate from 3.1% in ’16 to 3.6% in ’17.

    Hurricane Harvey, which made landfall on August 25, cast a long shadow overUS chemicals in Q3. Due to the hurricane and its aftermath many US chemicalcompanies experienced negative impacts from shuttered plants, lostproduction, tight raw material supply conditions, higher distribution andlogistics costs and supply chain disruptions. As a result no less than a dozenUS chemical companies preannounced earnings shortfalls or talked downnumbers for the quarter. The good news is that underlying demand ex Harveyremained solid in Q3and Q4should see benefits from the hurricane in the formof price increases, restocking and rebuilding. Top picks: DWDP, EMN, ASH.

    Top Picks: Dow/DuPont and Ashland Global.

    In Q3,we expect Specialty and Differentiated Chemical companies to post 10% YoYEPS growth driven by solid demand, FX tailwinds, cost reductions and sharebuybacks. We expect Commodity Chemical producers to post YoY higher earningson higher prices and growing demand.

    Top Picks: DowDuPont, Ashland Global and Eastman

    Global GDP growth is expected to accelerate from to 3.6% in ’17 from 3.1% in ’16.

    DB’s economics team forecasts US GDP growth slowed to 2.0% in Q3 from 3.1% inQ2. For Q4, US GDP growth is forecast to accelerate to 3.1% as most of the lostoutput and delayed purchases in Q3 due to hurricane related disruptions areexpected to be made up in Q4. In Europe, DB’s economics team forecasts Q3 GDPgrowth of 0.6% QoQ. For Q4, Europe GDP growth is forecast to slow slightly to0.5% QoQ. China’s GDP growth slowed to to 6.6% in Q3 from 6.9% in Q2. For ’17DB’s economics team forecasts US GDP growth of 2.4% (vs 1.8% in ’16), EuropeGDP growth of 2.2% (vs 1.8% in ’16), China GDP growth of 6.7% (vs 6.7% in ’16)and global GDP growth of 3.7% (vs 3.1% in ’16).

    US contract ethylene margins compressed 3.7c/lb in Q3to 14.8c/lb on flat prices(at 31.9c/lb) and higher production costs (up 3.7c/lb to 16.4c/lb and up 34% YoY).Meanwhile, polyethylene (PE) prices rose $0.02/lb in Q3(to $0.75for HDPE) asHurricane Harvey resulted in extensive capacity shutdowns leading to materialbecoming short or non-existent in some cases. In Q4, we expect US ethylene chainmargins to improve as hurricane-induced tight supply/demand fundamentalssupport elevated PE pricing. We expect hurricane impacts and supply/demandtightness will linger thru October and pass starting in November.

    Differentiated / specialty chemical companies forecasted to post 4% EPS growth.

    Meanwhile, polyethylene (PE) prices rose $0.02/lb in Q3 (to $0.75 for HDPE) asHurricane Harvey resulted in extensive capacity shutdowns leading to materialbecoming short or non-existent in some cases. In Q4, we expect US ethylene chainmargins to improve as hurricane-induced tight supply/demand fundamentalssupport elevated PE pricing. We expect hurricane impacts and supply/demandtightness will linger thru October and pass starting in November.

    In Q3,we expect Specialty and Differentiated Chemical companies to post 10% YoYEPS growth driven by solid demand, FX tailwinds, cost reductions and sharebuybacks. We expect Commodity Chemical producers to post YoY higher earningson higher prices and growing demand.

    DB’s economics team forecasts US GDP growth accelerated to 3.5% in Q2 from1.2% in Q1. For Q3, US GDP growth is forecasted to slow 3.0% as solidhousing/construction activity (housing starts up 12% YoY in ‘17E) is partially offsetby sluggish industrial and manufacturing activity. In Europe, DB’s economics teamforecasts GDP growth declined to 1.9% in Q2 from 2.3% in Q1. For Q3, Europe GDPgrowth is forecasted to slow to 1.7%. China’s GDP grew 6.9% in Q2 vs a similar6.9% in Q1. For ’17 DB’s economics team forecasts US GDP growth of 2.4% (vs1.6% in ’16), Europe GDP growth of 1.8% (vs 1.7% in ’16), China GDP growth of6.7% (vs 6.7% in ’16) and global GDP growth of 3.6% (vs 3.1% in ’16).

    Ethylene chain margins compress in Q3.

Expect solid Q2 results on healthy demand, price increases. Top Pick: DD/DOW.

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