Supply chain bottlenecks and rising inflation have been the major factors dampening the basic material sector's growth. However, a boom in infrastructure operations, such as road construction and maintenance, bridge building and repair, port development, and housing construction should help the sector achieve significant growth this year.
While the industry has made substantial progress over the past couple of years, an improving global economy and clean-energy drives should further propel the industry's growth. Investors' interest in this space is evident in the ProShares Ultra Basic Materials ETF's (UYM) 32.7% gains over the past year versus the S&P 500 Trust ETF's (SPY) 14.8% returns.
Therefore, we think it could be wise to bet on basic material stock Linde PLC (LIN), CRH PLC ADR (CRH), and TERNIUM S.A. ADR (TX). They are each currently trading below their 52-week price highs but have the potential to rebound in the coming months.
Linde PLC (LIN)
Headquartered in Guildford, U.K., LIN functions as an industrial gas company, which supplies oxygen, nitrogen, argon, rare gases, carbon dioxide, hydrogen, and other specialty gases in North and South America, Europe, the Middle East, Africa, and the Asia Pacific.
This month, LIN signed a long-term agreement with BASF, a leading chemical company, to supply hydrogen and steam. LIN will develop, design, own, and run a new hydrogen production facility at Chalampé, France, successfully doubling its current capacity. BASF's new hexamethylenediamine (HMD) manufacturing facility will be supplied at this second plant, which will help in meeting the rising demand from LIN's local merchant customers for hydrogen.
Also, this month, LIN expanded its existing agreement with Celanese Corporation, a global chemical and specialty materials company. It will begin supplying carbon dioxide and hydrogen to the Celanese manufacturing facility in Clear Lake, Tex. According to the agreement, LIN will also supply carbon dioxide captured in its nearby carbon monoxide production facility. The hydrogen supplied by LIN will have a lower carbon intensity by using the carbon dioxide captured from its facility. This agreement should be a significant step for preserving the environment.
During the fourth quarter, ended Dec. 31, 2021, LIN's net sales increased 14% year-over-year to $8.30 billion. Its operating income grew 14% from its year-ago value to $1.34 billion, while its net income improved 33.2% year-over-year to $1.03 billion. Its EPS increased 37% from its year-ago value to $1.98.
Analysts expect LIN's revenue to increase 10.7% year-over-year to $8.02 billion in the first quarter (ending March 2022). The company's EPS is expected to grow 11.5% year-over-year to $2.78 in the first quarter ending March 2022.
The stock has gained 20.1% in price over the past year. In addition, closing yesterday's trading session at $293.24, the stock is currently trading 16.7% below its 52-week high of $352.18, which it hit on Jan. 5, 2022.
LIN's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
LIN also has a B grade for Quality and Stability. Within the A-rated Chemicals industry, it is ranked #28 of 89 stocks. To see additional POWR Ratings for Growth, Value, Momentum, and Sentiment for LIN, click here.
CRH plc (CRH)
Ireland-based CRH manufactures and distributes building materials through its subsidiaries. The company operates primarily in Americas Materials; Europe Materials; and Building Products. CRH manufactures and supplies cement, lime, aggregates, precast, ready mixed concrete, architectural glass, custom-engineered curtain, and other products for the construction industry.
Last December, Oldcastle APG, a CRH company, acquired the recycling and mulch operations of South Jersey Agriculture Products (SJAP), one of the largest lawn and garden product manufacturers in southern New Jersey. SJAP will help raise Oldcastle APG's manufacturing capabilities in the soil and mulch product categories. The acquisition of SJP's recycling and mulch operations will increase its production capacity and market share in the preferred Mid-Atlantic region, increasing its diversification into the lawn and garden category.
During the six months ending June 30, 2021, CRH’s net sales increased 14.1% year-over-year to $14.04 billion. Its gross profit grew 19.7% from its year-ago value to $4.61 billion. And the company's group profit surged 100.7% from its prior-year quarter to $815 million, while its EPS increased 95.1% year over year to $99.5c.
The $3.12 consensus EPS estimate for its fiscal year 2021 indicates a 120% improvement year-over-year. Also, the company's shares have surged 3.6% in price over the past year. Furthermore, closing yesterday's trading session at $44.89, the stock is currently trading 17.7% below its 52-week high of $54.54, which it hit on Jan. 4, 2022.
CRH's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Stability and Sentiment. In the B-rated Industrial - Building Materials industry, it is ranked #4 of 54 stocks.
In total, we rate CRH on eight different levels. Beyond what we've stated above, we have also given CRH grades for Growth, Value, Momentum, and Quality. Get all the CRH ratings here.
Ternium S.A. (TX)
TX manufactures and processes various steel products through its subsidiaries in Argentina, Brazil, Mexico, Guatemala, Colombia, and the United States. The Luxembourg-based concern operates primarily in two segments: Steel and Mining. The Steel segment provides slabs, billets, round bars, hot-rolled flat products, and other steel components, whereas its Mining segment sells iron ore and pellets.
This month, TX announced a new investment program at its Pesquería industrial center in Mexico with the goal of widening its value-added product portfolio. This scheme is expected to help TX cater to the automotive, renewable energy, home appliance industries, and the construction and agricultural sectors. Augmenting Pesquería facility's advanced-high-strength and ultra-high-strength steel production capabilities will help support TX's position as a Steel supplier in Mexico.
TX's net sales increased 67.8% year-over-year to $4.33 billion in the fourth quarter, ended Dec. 31, 2021. Its operating income grew 55.9% from its year-ago value to $1.36 billion. The company's profit for the period rose 31.4% from the prior-year quarter to $1.14 billion, while its EPS came in at $5.08.
The $3.51 consensus EPS estimate for the first quarter, ending March 31, 2022, represents a 14.3% improvement year-over-year. Analysts expect TX's revenue to increase 37.2% year-over-year to $4.46 billion in the first quarter, ending March 31, 2022. Furthermore, it has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has soared 27.9% in price over the past year and 7.3% over the past nine months. In addition, closing yesterday's trading session at $39.28, the stock is currently trading 30.9% below its 52-week high of $56.86, which it hit on Aug. 11, 2021.
It is no surprise that TX has an overall B rating, which equates to Buy in our POWR Ratings system. TX has an A grade for Value and Momentum and a B grade for Quality. Among the 34 stocks in the A-rated Steel industry, it is ranked #15.
Click here to see the additional POWR Ratings for TX (Growth, Stability, Value, and Sentiment).
LIN shares were trading at $283.52 per share on Tuesday morning, down $9.72 (-3.31%). Year-to-date, LIN has declined -18.16%, versus a -9.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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