We recently compiled a list of the 10 Undervalued Chemical Stocks to Invest In. In this article, we are going to take a look at where Cabot Corporation (NYSE:CBT) stands against the other undervalued chemical stocks.
Key Trends Shaping the Future of the Chemical Industry
Chemicals are essential to our daily lives and play a crucial role in many sectors. The chemical industry provides the materials needed to create a wide range of products, from medicines and agricultural chemicals to plastics and cleaning supplies. This industry also supports innovations in renewable energy, such as solar panels and wind turbines. It also helps produce lightweight materials for vehicles, advanced batteries for electric cars, and durable building materials.
Increasing demand for sustainable and innovative products, advancements in technology, and urbanization, are some of the key factors driving growth of the chemicals market. According to a report by The Business Research Company, the chemicals market was valued at $5.11 trillion in 2023. The market is expected to grow at a compound annual growth rate (CAGR) of 8.7% during 2024-2028 to reach a value of $7.78 trillion by the end of the forecast period.
The chemical industry is currently experiencing significant changes driven by sustainability and technological advancements. The industry plays a crucial role in addressing global challenges like climate change and resource efficiency. According to a recent sustainability report titled “Sustainability Starts with Chemistry,” released by the American Chemistry Council (ACC) in May 2024, ACC member chemical companies have made significant progress in reducing emissions. Since 2017, these companies have cut sulfur oxide (SOx) emissions by 43% and nitrogen oxide (NOx) emissions by 18%.
The report highlights that member companies of the ACC are exploring, developing, and deploying various innovative technologies that reduce emissions. These include methods for capturing, using, and storing carbon, as well as producing lower-emissions hydrogen and exploring alternative feedstocks. This showcases their commitment to environmental responsibility and sustainable practices.
Innovation continues to be a top priority for the chemicals industry. On January 16, 2024, McKinsey & Company published an article that discussed a survey conducted by the company of over 200 senior leaders in North America’s chemical sector, including top executives from leading companies, investment firms, and startups. The survey found that chemical process innovation is viewed as the most important focus area, with 90% of investors and 97% of industry leaders planning to invest more than $50 million in this area over the next two years. While AI-assisted discovery is not considered the top priority, it remains a significant area of interest. According to the survey results, 43% of investors and 75% of chemical industry leaders are looking to invest over $100 million in AI-driven product development.
Digitalization is another crucial factor shaping the future of the chemical industry. According to Deloitte’s 2024 chemical industry outlook, digital investments in the sector declined in 2023, partly due to a sluggish US economy and high interest rates. After a 6.6% increase in 2022, spending on information technology in the chemical industry is expected to drop by 0.1% in 2023. However, this drop is likely to be short-lived. Many chemical companies are launching AI programs aimed at accelerating research and development for sustainable products, predicting the effects of production changes, and gaining valuable insights by tracking data throughout the entire value chain.
Overall, as the chemical industry embraces sustainability, innovation, and digital transformation, it positions itself for growth. Companies that prioritize these trends can not only contribute positively to the environment but also achieve better financial performance in the long run.
Methodology
To compile our list of the 10 undervalued chemical stocks to invest in, we reviewed our own rankings, sifted through ETFs, and consulted various online resources. From an initial pool of over 30 chemical stocks, we focused on those trading at under or around 15 times their forward earnings as of October 24. We further narrowed down our selection by looking for chemical stocks expected to show positive earnings growth this year.
Next, we ranked the best chemical stocks based on hedge fund holdings. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 10 undervalued chemical stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up of a technician using complex equipment to test a sample of catalyst.
Cabot Corporation (NYSE:CBT)
Forward P/E: 13.72
Earnings Growth: 31.20%
Number of Hedge Fund Holders: 22
Cabot Corporation (NYSE:CBT) is an American specialty chemicals and performance materials company. It is a leading provider of reinforcing carbons, specialty carbons, battery materials, engineered elastomer composites, inkjet colorants, masterbatches and conductive compounds, fumed metal oxides and aerogel. Through its wide range of products and solutions, the corporation serves key industries like transportation, infrastructure, environment and consumer.
The company reported strong financial results for the third quarter of fiscal 2024, with diluted earnings per share (EPS) of $1.94 and adjusted EPS of $1.92, reflecting a 35% increase in adjusted EPS compared to the same quarter last year. The Reinforcement Materials segment generated an EBIT of $136 million, a 3% rise year-over-year. The Performance Chemicals segment saw a remarkable 72% increase in EBIT to reach $55 million. During this quarter, Cabot Corporation (NYSE:CBT) generated cash flows from operations totaling $207 million, allowing the company to return $73 million to shareholders through a combination of share repurchases and dividends.
During the company’s Q3 2024, a significant highlight was the launch of Cabot Corporation’s (NYSE:CBT) new REPLASBLAK universal circular black masterbatches, which are the first of their kind with International Sustainability and Carbon Certification (ISCC PLUS). This innovative product line offers customers a versatile masterbatch suitable for various automotive applications, including coloring polyolefins and engineering plastics.
Additionally, on September 20, 2024, Cabot Corporation (NYSE:CBT) announced it had been selected for an award negotiation of up to $50 million from the U.S. Department of Energy. This grant will support the corporation’s development of a new manufacturing facility for battery-grade carbon nanotubes and conductive additive dispersions, critical for the domestic lithium-ion battery supply chain.
Over the past 5 years, Cabot Corporation (NYSE:CBT) has grown its net income at a compound annual growth rate (CAGR) of 16.95%, while its levered free cash flow has increased at a CAGR of 9.54% during the same period.
With strong financial performance, innovative product launches, and strategic investments in sustainability, CBT presents a compelling opportunity. It is one of the best chemical stocks to buy. According to Insider Monkey’s database, 22 hedge funds held stakes in Cabot Corporation (NYSE:CBT) in the second quarter of 2024.
Overall CBT ranks 7th on our list of the undervalued chemical stocks to buy. While we acknowledge the potential of CBT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CBT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.