Industrial Chemicals: 3 Stocks Poised for Growth in the New Year

Key Points

• Chemical companies thrived prior to the pandemic but have recently struggled due to inflation, soft-end markets, and other factors.
• Still, firms like Quaker Houghton, Balchem, and H.B. Fuller may give investors reason to become more bullish on the industry.
• It is possible that 2025 will bring a looser regulatory environment, which could benefit companies in this space.

The chemicals industry—companies creating chemicals used in industrial, commercial, and a variety of other applications—thrived for many years leading up to and including the COVID-19 pandemic. However, a recent report by McKinsey & Co. shows that the period since the end of the pandemic has brought a sharp reversal of this trend, with chemicals companies as a group achieving growth of under 2% per year since late 2022 while global indexes have increased 24% per year over the same period.

Why the sudden and significant shift? Persistent inflation has been a major headwind for much of the period in question, alongside other factors, including high energy prices, changes in regulations, and an imbalance of production capacity and demand. As inflation mounted and while interest rates have risen, many of the industries most commonly making use of chemical products—consumer packaged goods, automotive, and more—saw growth slow or even reverse, stifling the demand for these products.

Despite the challenges of recent years, 2025 may bring renewed growth to some companies in the chemicals industry, particularly if the regulatory environment eases. Some of the firms that could benefit from these external shifts in the new year include Quaker Houghton NYSE: KWR, Balchem Corp. NASDAQ: BCPC, and H.B. Fuller Co. NYSE: FUL.

Quaker Houghton: External Factors Hinder Recent Performance

As of December 19, 2024, shares of Quaker—a maker of process fluids for a host of different industrial applications—traded at a 52-week low, with a one-year total return of nearly -34%. The company's third-quarter earnings results appear lackluster, with a 6% year-over-year decline in net sales to $462 million for the quarter and a marginal decline in net income over the same period; they also provide reasons for optimism.

Quaker said that several external factors, such as soft-end market conditions, primarily contributed to its sales decline for the latest quarter. Even still, new business helped to offset the damage caused by these elements. Pricing has been strong as well, helping to minimize the negative impact.

This is all to say that many of the company's fundamental business factors remain compelling for investors. The merger of Quaker Chemical and Houghton International prior to the pandemic brought together two leaders in industrial fluids, aiming to make a powerhouse company that would dominate both domestically and on an international scale. However, setbacks due to the pandemic have hindered that process—it may now finally be the case that the company is able to overcome those barriers in 2025.

Balchem: Nutrition Chemical Business Drives Growth

Producer of ingredients used by makers of food, animal products, and pharmaceutical companies, Balchem has fared better than Quaker in recent months. As of December 19, 2024, this firm has a one-year return of 16.3%. Net sales for the latest quarter increased by more than 4% year-over-year on the strength of the company's Human Nutrition and Health and Special Products segments.

The former of these two segments may have investors particularly excited heading into 2025. Balchem's Human Nutrition and Health business produces formulations for use in multivitamins and related products, which may see a boost should Robert F. Kennedy Jr. become Secretary of Health and Human Services in the incoming administration.

Balchem's free cash flow of more than $42 million for the last quarter helped the firm to pay down $39.6 million in revolving debt, bringing its net debt to just over $153 million. The firm has also recently increased its dividend by 10%—Balchem has a manageable payout ratio of 23.4%, which should allow it to continue to pay out dividends comfortably for the foreseeable future.

H.B. Fuller: Mounting Debt, But a Solid Foundation

H.B. Fuller makes a variety of adhesives and similar products for use in construction, health and hygiene, and engineering applications. The firm recently made efforts to reorganize its business and grow through acquisitions, a process that diversified its operations but increased net debt significantly to about $2 billion. With about $3.5 billion in sales for 2023, H.B. Fuller has a solid foundation, but margin pressure remains an ongoing concern.

With shares down more than 15% in the year leading to December 19, H.B. Fuller appears more attractive as a value candidate. The company has a P/S ratio as of the same date of about 1.1. This may be why analysts rate FUL shares as a Moderate Buy and have assigned the company a consensus price target of $92.75, about 34% above the current price level.