The market is reacting – chemical company valuations are now back to or even below their pre-pandemic levels

The war in Ukraine will negatively impact the European chemicals sectors in the months ahead, especially in the back half of the year. A new report from Morningstar claims current sector guidance is too optimistic, particularly for industrial chemicals, as it doesn’t account for the war, which will likely stretch out the current inflationary raw material environment.

Morningstar believes no-moat industrial chemical companies will find it difficult to pass on raw material costs given extended inflation and softening demand in due to rising interest rates.  While consumer chemical companies are better positioned to pass on rising input costs, higher interest rates are a major headwind for valuations given their “long-duration” nature. 

But the outlook isn’t universally grim. Morningstar prefers Lanxess due to its compelling valuation (0.5 times P/FVE) and dual catalysts (business transformation, lithium project) that should create value regardless of the economic environment. The company also has a strong outlook on Chr. Hansen given its relatively attractive valuation versus peers, wide moat rating, and leading organic growth outlook.

The full report, which looks across the sector, can be read here.