As the commodity market shifts to an environment of stagflation and U.S. economic recession risks rise, Bank of America adjusted its coverage of chemical stocks on Tuesday.
The Analyst: Analyst Steve Byrne downgraded Chemours Co. (NYSE:CC) from Buy to Neutral and slashed his price target from $48 to $44. Byrne also double-downgraded Huntsman Corporation (NYSE:HUN) from Buy to Underperform and cut his price target from $45 to $34.
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The Thesis: Byrne cut price targets across his chemical coverage and said chemical stocks will take a hit as economic growth slows and the sector faces margin compression after two years of robust profits.
The BofA Petrochemical Sentiment Indicator is now off its highs from late 2021, and past cyclical downturns in the cycle have averaged 14.5 months with an average peak-to-trough time of eight months, Byrne said.
Huntsman shares are still attractively valued based on current estimates, but those estimates may be too high considering potential margin compression and lack of stability in Performance Products profits, he explained.
"We favor CC stock over the long term, but see risk of earnings stalling out over the next twelve months ahead of a more meaningful acceleration in 2024 on a better regulatory backdrop," Byrne said.
Despite the headwinds, Byrne still sees investment opportunities in the chemical space for selective buyers. His top stock picks include Buy-rated International Flavors & Fragrances Inc. (NYSE:IFF), Linde PLC (NYSE:LIN) and Sherwin-Williams Co. (NYSE:SHW).
Benzinga's Take: Investors who dabble in cyclical businesses such as the chemical market understand the ups and downs of the profitability cycle. If Byrne is correct, the profit party may be over for the chemical group for the next year or so.
