Sector Snap: Specialty chemicals slide

Several specialty chemical makers, including Ashland Inc. and Spartech Corp., will likely see 2009 earnings hurt by lower demand, an analyst said Monday.

"We have become more bearish on the sector particularly as a rough fourth-quarter earnings season is likely in store," KeyBanc Capital Markets analyst Michael J. Sison said in a note to clients. "History tells us that specialty chemical stocks do not outperform in early- to mid- recessionary dynamics, but can certainly outperform with strength in late recession and early recovery stages of the broad economy."

Ashland, Spartech, Ferro Corp., H.B. Fuller Corp. and Omnova Solutions Inc. "will likely struggle in 2009 given stiff recessionary conditions, and in our minds have limited levers to offset deteriorating demand conditions," Sison said.

He downgraded all five companies to "Underweight" from "Hold."

Specialty chemical companies make products like food additives and industrial cleaners, as opposed to basic chemical companies, which make items like plastic shopping bags.

Specialty chemical companies are less reliant on wild swings in crude prices, which was a positive in 2008 as oil costs spiked. But the economic recession, coupled with a drop in demand, harshly affected the subsector.

In midday trading, shares of Ashland fell $1.06, or 9 percent, to $10.77; shares of Spartech dropped 82 cents, or 13.7 percent, to $5.15; shares of Ferro slid 87 cents, or 13.2 percent, to $5.74; shares of H.B. Fuller fell 84 cents, or 5.4 percent, to $14.68; and shares of Omnova Solutions dipped 6 cents, or 6.7 percent, to 84 cents.

Meanwhile, Jefferies & Co. analyst Laurence Alexander said chemical companies _ some of whom have seen shares jump in recent days _ may be vulnerable as earnings season begins.

"Chemicals in 2009 are a tug-of-war between near-term expectations of weak demand and margin pressure, and the hope of cyclical recovery in (the second half of 2009) or 2010," Alexander said in a note to clients.

The Standard & Poor's Chemicals Index, a basket of industry stocks, fell 4.23 points, or 2.2 percent, to 191.71 in midday trading.