Rubber and plastics stocks have struggled so far in 2020. There isn’t an index or exchange-traded fund that precisely delineates how the group has performed this year. But most names in the category have declined year-to-date.
That alone makes the group interesting. After all, U.S. equities have recovered most of the losses from the March selloff. Those stocks that haven’t recovered mostly are in sectors like travel or media — and thus facing potential multi-year headwinds. Demand for some plastics and rubber stocks should rebound more quickly. In some cases, lower prices for crude oil, a key input, can help profit margins.
There are some reasons for caution, however. Prices of key commodities have fallen sharply amid lower demand and in line with the drop in oil. Tire usage is down markedly, particularly for consumer vehicles. In plastics, rising environmental concerns present a potential mid- to long-term headwind.
Plastics and rubber stocks generally are cheap. But many have been cheap for a while — yet haven’t performed well. There is certainly a “value trap or value play” question for many of the industry’s stocks.
These five, however, look like potential winners:
- Trinseo (NYSE:TSE)
- Michelin (OTCMKTS:MGDDY)
- Berry Global (NYSE:BERY)
- AptarGroup (NYSE:ATR)
- Myers Industries (NYSE:MYE)
5 Rubber and Plastics Stocks: Trinseo (TSE)
There’s one important thing to remember when it comes to Trinseo stock: It is not for the faint of heart. TSE shares traded near $15 toward the end of 2014. Shares would rally from there to over $80 at the beginning of 2018. They returned to $15 in March before rallying over the past few months.
The pandemic isn’t the primary cause, either. Shares entered 2020 down more than 50% in two years. Rather, Trinseo’s profits have shown tremendous volatility. Adjusted earnings per share were $1.44 in 2014, and $8.13 in 2017. Given that massive growth, it’s little surprise TSE stock rallied so sharply.
The problem is that growth is reversing. Adjusted EPS plunged to a little over $3 last year. Wall Street consensus for next year sits just under $2.
But investors now may be forgetting the lesson of 2018: This simply is a hugely cyclical business. Trinseo manufactures synthetic rubber for the tire industry, where demand has been pressured. Crashing spreads in styrene monomer, which underpins the company’s Feedstocks segment, have had a huge impact on earnings as well. Profit in that segment fell nearly 90% in two years, according to Trinseo’s Form 10-K filing with the U.S. Securities and Exchange Commission.
TSE stock now, however, trades at about 11x what look like trough earnings. Management remains confident. The company has continued to pay a dividend that now yields over 7%. TSE stock may take some patience, but if and when the cycle turns back in the company’s favor, potentially enormous upside looms.
As noted, tire companies like Michelin are no doubt taking a hit at the moment from the novel coronavirus pandemic. But there’s a case that the industry may see a boost in coming years.
After all, public transportation or services like Uber (NYSE:UBER) now look far less attractive. Miles driven likely will increase not just in the U.S., but worldwide.
Investors might look to U.S. producers like Goodyear Tire & Rubber (NASDAQ:GT) or Cooper Tire & Rubber (NYSE:CTB) to play that trend. But Michelin stock looks like a more intriguing option. Its performance has been better than that of Goodyear, which was struggling long before the coronavirus arrived. Valuation relative to CTB looks more attractive.
Those investors who avoid foreign stocks similarly might avoid the OTC-listed MGDDY. But as far as tiremakers go, there’s a strong case that Michelin indeed is the best play.
Berry Global (BERY)
BERY stock really is a straight bet on plastics. Berry has executed a so-called “roll-up” strategy, steadily buying smaller businesses to drive growth. But its focus remains solely on plastic packaging.
That’s a double-edged sword. On one hand, there should be growth in those markets worldwide. Even in the near term, the same “pantry stocking” demand driving consumer packaged goods providers should help Berry’s results.
But on the other hand, there’s secular concerns about plastics growth more broadly. Recycling programs continue to pick up steam. Some producers are substituting more environmentally friendly options, including cardboard or aluminum.
BERY stock is a leveraged bet on that argument — from either side. The company has over $10 billion in debt on the balance sheet even net of cash. If its industry grows, that debt amplifies earnings and likely drives the stock higher. But if the company stumbles, that debt could become a significant problem.
AptarGroup is a perhaps more attractive version of the Berry Global story. AptarGroup’s sales lean more toward personal care, beauty and pharmaceuticals, which combined drive over 80% of revenue, according to a recent investor presentation.
Those end markets should be resilient — and less susceptible to disruption than those of Berry and other rubber and plastics stocks. Meanwhile, AptarGroup’s debt of $1.4 billion is more manageable than many other plays in the group.
The one concern is that the market has priced ATR stock accordingly. Shares trade at 28x next year’s consensus EPS. Given a long track record of consistent growth, and the defensive nature of the business, that multiple might be justified. But investors looking for higher-risk, higher-reward plays have options elsewhere in the space.
Myers Industries (MYE)
The concern with Myers Industries is history. Myers manufactures plastic and rubber products ranging from fuel tanks to storage containers to tire repair kits. It’s been a reasonably good business — but that’s done little for MYE stock.
Indeed, over the last 20 years, shares have gained just 33% total. The news is better including dividends, but the stock still has underperformed the market.
There were hopes that this time would be different after GAMCO Investors took an activist stake back in 2015. So far, that hasn’t quite been the case. Even excluding a plunge along with the market in March, MYE still would trade at a three-year low.
But there is hope for brighter days. End markets still are growing. Valuation remains reasonable, with shares trading at 18x 2019 adjusted EPS. A 3.8% dividend adds to the attractiveness for income investors. It’s possible the upside in MYE stock will arrive — just a few years later than hoped.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.