A Slow-Working Formula

After a terrible 2001, the specialty-chemicals industry is getting a lift from lower costs. S&P expects a rebound later in 2002

By Richard O'Reilly, CFA

The specialty-chemicals industry had an extremely difficult year in 2001, along with the overall chemicals industry. However, Standard & Poor's feels that the group's profits for the 2002 financial year could be boosted by lower raw-material expenses and the past year's cost-cutting actions. Investors seem to be catching on to the idea that earnings will eventually improve: Specialty-chemicals stocks have jumped 9.7% year-to-date through Apr. 5. In the same period, the S&P 1500 Super Composite index fell 1.5%.

S&P projects that earnings for the S&P Specialty Chemicals index will be about $13 per share in 2002, up from $7.98 in 2001. This is quite an improvement from 2001, when the group reported poor results because of downturns in demand from key end markets, margin pressure from high raw-material and energy costs early in the year, and unfavorable currency-exchange rates as a result of the strengthening U.S. dollar.

Of the 25 specialty-chemicals companies in the S&P 1500 index, 22 reported results for fiscal years ended October through December. For this group, aggregate sales rose 5% vs. the same period in 2000, but its net income fell by nearly two-thirds. This was the industry's worst annual performance in at least 10 years.

S&P expects the specialty-chemicals industry to report poor results through early 2002. As a result of soft overall global conditions, shipments will probably stay sluggish well into the first half of this year. But sales should begin recovering by the second half, when the economy is expected to strengthen.

In this group, S&P currently has a 4 STARS (accumulate) ranking on shares of Ecolab (ECL ), Sigma Aldrich (SIAL ), RPM (RPM ), and Avery Dennison (AVY ).

Analyst O'Reilly follows chemicals stocks for Standard & Poor's

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