Dow and 5 Other Stocks to Play the Future of Plastic

To make commodity chemical products such as the polypropylene in Ziploc bags, chemical companies start with inputs derived from oil or natural gas. The price of these energy products sets the costs and relative competitiveness within the industry. All chemical producers are trying to earn a “spread” over the input costs. How big that spread is depends on the state of the global economy and on supply and demand.

These dynamics mean that chemical stocks don’t make for easy investments. A diagram of products looks like a New York subway map. There is also what’s going on in the economy to consider, and energy markets help set input costs and product prices. Then, there are longer-term issues, such as sustainability, that can affect costs, returns, and valuations for the sector.

Right now, the plastics market is particularly fraught. Demand has weakened as central bankers raise interest rates, causing earnings estimates for the chemical companies to fall. But there’s also a chance that the Federal Reserve hasn’t done enough to slow inflation and the economy. If the economy accelerates, chemical producers will look more attractive.

Here are six chemicals and plastics companies worth a look:

Dow has a plastics problem. The company can produce about 10 million metric tons of polyethylene—used in everything from trash bags to toys—a year. Making it, however, releases carbon dioxide, a gas blamed for climate change. The company is trying to remedy that. Dow’s packaging division is focused on recycling and creating lighter products. Dow also plans to use hydrogen- and carbon-sequestration technology, so that no CO₂ is released into the atmosphere. Dow believes it can do all of that while improving earnings. If the Midland, Mich.-based company succeeds, its stock could be worth $100 in a few years, about 67% above the current level.

LyondellBasell Industries
(LYB) like Dow, is a huge chemical producer, and it makes, well, everything. Its products range from resins for plastic cups and car parts to foam insulation and pipes. Last year, the company pumped out $50.5 billion in revenue and $6.5 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda. But now, investors are worried about the economy, not sustainability. Still, CEO Peter Vanacker, who took over in May 2022 after running Finnish renewable-energy company Neste, has a long-term plan. It should be revealed at Lyondell’s investor day on March 14. Don’t be surprised if sustainability is on the agenda.

Celanese (CE) operates in three segments: acetyls, which are intermediate chemical products that end up in substances such as paint; engineered materials, everything from cars to medical devices; and acetate tow, which is used in cigarette filters. Celanese has less of a carbon problem than Dow and Lyondell. Acetate tow is biodegradable, and most of Celanese’s plastics aren’t of the single-use variety. Celanese has generated about $2.3 billion in Ebitda on average over the past three years, and Wall Street expects the number to approach $4 billion in coming years, boosted by the company’s acquisition of a DuPont de Nemours’ (DD) plastics division.

Berry Global Group
(BERY) takes the plastic resins produced by the likes of Dow and Lyondell and turns them into bags, bottles, and whatever else a customer needs. Making such products might raise environmental alarm bells, but “plastics are an engineered product,” says Baird analyst Ghansham Panjabi, meaning they can be re-engineered and made from more Earth-friendly options. Berry trades at just 8.6 times earnings for its fiscal year ending in September, a low multiple that reflects the company’s large debt load, generated by an aggressive acquisition strategy. Management plans to pay down debt and return cash to shareholders. As that process unfolds, the stock should rise.

Established in 2008,
Origin Materials
(ORGN) aims to make plastics out of nonfood biomass, including wood and wood waste. The company says that it will be carbon-negative because the carbon locked up in the trees exceeds the amount that will be released during manufacturing. Origin is finishing its first plant in Sarnia, Ontario, where it will produce polyethylene terephthalate, a recyclable material used to make products including bottles for soda and shampoo. It has no sales yet, so valuing it can be tricky, just as it is for all speculative stocks. Still, Fermium Research analyst Frank Mitsch is confident that the shares can deliver. The technology “passed my test,” he says.

Illinois-based
Univar Solutions
(UNVR) distributes chemical products—including those used to make plastic—to more than 100,000 customers across 115 countries from about 600 facilities. The stock trades for 11.6 times estimated 2023 earnings, a reasonable multiple for a company that has grown Ebitda to more than $1 billion annually from about $600 million a few years ago. Fellow chemical distributor Brenntag (BNR.Germany), which tried to buy Univar at the end of 2022, seemed to think the multiple was reasonable, too. A deal wasn’t struck, but private-equity firms are looking at Univar, Mitsch says. So, investors eventually might get a takeout premium.

Write to Al Root at allen.root@dowjones.com