Chemical Sector Outlook: Ecolab, Linde, and Sherwin-Williams Downgraded Amid Market Shifts

Seaport Research Partners analyst Michael J. Harrison downgraded a few chemical stocks ahead of their earnings release amid chemical industry's sluggish market fundamentals.

In the Chemical industry, the analyst anticipates destocking to run its course during H1 FY24, and several companies are projected to face easy comps after multiple quarters of unusually weak order patterns. 

Harrison anticipates raw material costs to stabilize, and projects 

price/cost to be a modest tailwind for most companies in H1 FY24, though many companies are suggesting price/cost to be more neutral in 2024.

Consequently, the analyst downgraded Ecolab Inc ECL, Linde PLC LIN, Sherwin-Williams Co SHW to Neutral from Buy rating.

ECL: The analyst believes that many positive drivers for 2024 are already factored into the stock and modestly reduced the outlook to reflect the slower ramp-up in Healthcare and Life Sciences margin improvement, partly offset by higher foreign exchange assumptions. 

The analyst estimates EPS of $6.20 (from $6.25) vs. consensus $6.14 for FY24 and $7.12 (from $7.22) vs. consensus $7.07 for FY25.

However, Harrison continued to see ECL as an interesting longer-term company, given its strong pricing power, annuity-like business model, and potential for further share gains, among other factors.

LIN: The analyst downgraded the stock at its shares approaching the previous price target of $330.

Harrison sees Clean Energy as a longer-term catalyst and assumes pricing to hold up well, generating further margin benefits as inflationary pressures moderate, but doesn't expect strong underlying volume growth. 

The analyst projects China to remain sluggish well into 2024 and doesn't expect improvement in Electronics in broader Asia until mid-2024. 

The analyst estimates EPS of $15.56 ($15.43 estimate) in FY24 and $17.13 (vs. $16.99 estimate) in FY25.

Harrison tweaked estimates to reflect benefits from updated FX assumptions, more normalized margin assumptions for the Engineering business, and updated energy pass-through assumptions. 

SHW: The analyst writes that the share is close enough to their prior $305 price target and suggests that at least some potential upside from these catalysts are already reflected in the share price.

The analyst says that SHW has been experiencing elevated SG&A costs related to growth investments and pricing efforts that could limit near-term upside.

Harrison assumes PSG volumes to turn positive Y/Y in Q2 and accelerate in H2. 

The analyst expects EPS of $11.25 (in line) in FY24 and $12.75 (vs. $12.55 estimate) in FY25.

Price Action: SHW shares are down 0.10% at $296.39, LIN is down 0.89% at $405.49, ECL is down 0.60% at $194.07 on the last check Monday. 

Phoot via Sherwin-Williams