UNVR - Sherwin Williams Ecolab downgraded at BofA amid 'value destructive environment'

Bank of America analyst Steve Byrne advised that escalating headwinds facing chemical stocks call for a reassessment of ratings across the chemical space.

He noted that end market selection is pivotal for investors in the space, much the same as valuation concerns need to be accounted for. The latter is particularly important in a rising rate environment, according to Byrne’s analysis.

Rising rates are likely to impact housing and construction demand and this will, logically, hurt Sherwin Williams ( NYSE: SHW ), he explained. Byrne suggested autos and aerospace as more attractive end markets.

“For names like Sherwin-Williams ( SHW ), this creates a particularly value destructive environment,” he told clients. “Key unknown here is whether investors can rely on the higher valuations from recent years as a benchmark for specialties. We believe this is a difficult proposition in a rising rate environment.”

Sherwin Williams ( SHW ) was downgraded from “Buy” to “Neutral” and the price target was trimmed from $313 to $292 based upon a lower assigned multiple set at 21x earnings.

“The new multiple is consistent with a longer (10 yr) average multiple for Sherwin but is similarly consistent with trough multiples on a 5yr basis, which feels right considering the risk of market stagnation,” Byrne concluded.

For Ecolab ( NYSE: ECL ), Byrne admitted that he has “limited conviction in the ability of Ecolab to accelerate growth meaningfully beyond raw material cost offsets” despite its outperformance since his upgrade to “Buy” in March. Moving forward, he sees “limited catalysts” to drive performance into 2023.

“We see better value elsewhere,” Byrne said simply. “We see more attractive opportunities with specialty names that have more cyclical upside like Axalta ( AXTA ) and PPG Industries ( PPG ), or specialty names like International Flavors & Fragrances ( IFF ).”

Other price target changes in the chemical space included:

• Celanese Corporation ( CE ): Neutral reiterated, Price target: $171 ? $144

• DuPont de Nemours Inc ( DD ): Buy reiterated, Price target: $77 ? $73

• Eastman Chemical Company ( EMN ): Neutral reiterated, Price target: $123 ? $115

• Ecolan ( ECL ): Downgrade Buy ? Neutral, Price target: $193 ? $183

• International Flavors & Fragrances ( IFF ): Buy reiterated, $169 ? $161

• Linde Plc ( LIN ): Buy reiterated, Price target: $370 ? $369

• PPG Industries ( PPG ): Buy reiterated, Price target: $172 ? $161

• Sherwin Williams ( SHW ): Downgrade Buy ? Neutral, Price target: $313 ? $292

• RPM International: Underperform reiterated, Price target: $90 ? $72

• Univar Inc. ( UNVR ): Buy reiterated, Price target: $36 ? $34

• Air Products & Chemicals, Inc. ( APD ): Neutral reiterated, $272 ? $271

Read more on Wells Fargo’s 50 stocks to avoid .

For further details see: