Croda and Victrex gain as Goldman picks top chemicals stocks

Goldman Sachs has given Croda a 'buy' rating and taken a 'neutral' stance on Victrex as it began coverage on 16 companies in the European chemicals sector.

Goldman expressed an initial preference for 'downstream' chemicals companies and their more stable margins and return rather than more cyclical 'upstream' producers.

Croda was one of the stocks added to the investment bank's conviction-buy list, on the expectation of renewed earnings momentum from improvements in the personal care segment, the Yorkshire-headquartered group's biggest earnings contributor, along with tailwinds from raw materials prices and strong pricing power.

After two challenging years of slowing growth and forex headwinds, GS confidently set a price target offering more than 20% upside at 3,400p, as it predicts consensus earnings upgrades as the FX effects fade and sustained margin improvements are reaped from the new bio-surfactant site at Atlas Point, Delaware.

"As industrial capex slows, we expect consumer companies to emerge as relative winners. Croda is ideally positioned to benefit from this theme," Goldman said.

Analysts predict consumer momentum will likely outpace resource-linked industrial growth in both developed and emerging markets, which also increases Croda’s strategic appeal.

For Victrex, which will gain less from raw material tailwinds, a 12-month price target of 2,000p offers a potential gain of 5% as the high-performance polymer producer faces a tough year for growth and returns in 2016.

It calculated that sales and earnings are forecast to increase by 3% and, with a delayed oil & gas impact and tough comparable figures from last year in the electronics business, its forecast of £110.3m earnings before interest and tax next year is circa 4% below consensus.

However, from 2017, as several 'megaprojects' come on stream, Goldman said it expects Victrex to show its typical strength in sales growth again.

"The company’s project pipeline is supported by its unique industry position and sharp focus. The resulting pricing power stands out among other industrial-exposed chemical companies."