October 24, 2025

Chemicals: Profit Margins are Everything

One of the most attractive industries right now for turnaround-focused investors is chemicals, with the share prices for many major producers in this group hovering at or near multi-year lows.

The reasons for this collective underperformance vary, and while not all chemical companies are in a classic turnaround situation, many of them are under serious margin pressures and are implementing strategic plans aimed at improving their company’s fortunes and reversing the stock price declines.

In spite of seemingly rampant inflation pressures across the broad economy, chemical producers aren’t necessarily seeing the same upward pressures for the feedstocks they use. At face value, subdued natural gas prices (a common feedstock for many chemical makers, particularly in the U.S.), along with lower prices across several major chemicals in the last couple of years, have afforded a degree of insulation from broader inflationary pressures.

Specifically, natural gas prices are down by a whopping 60% from the market’s peak three years ago, providing some relief for makers of chemicals like ethylene and propylene—both of which are used heavily for making plastics.

The lower feedstock costs would normally be bullish for major plastics producers like LyondellBasell (LYB). However, other, more aggravating factors have created some serious headwinds for the company and many of its industry peers.

Among those negative factors are a slowing U.S. economy (in part due to inflation), with lower demand among end-user markets like construction, consumer durables and automotive, leading to overall chemical volumes, plus lower sales and earnings.

Additional factors weighing against chemical makers include U.S. tariffs on chemical imports from China, which are expected to raise raw material costs by an average of 12% for U.S. firms, in turn likely to adversely impact margins.

Consequently, output is predicted to be lower in 2025 (down 1.4% to be exact) for producers of plastic resins as manufacturing and export demand declines. (By contrast, consumer and agriculture chemicals are projected to be the strongest performers within the overall chemical space, with volume increases likely to offset weaknesses in other segments.)

Concerning LyondellBasell, in a recent earnings call, CEO Peter Vanacker acknowledged the downcycle in the plastics industry in no uncertain terms:

“This is the longest downturn in my 35 years in the industry. And with our strategic and also intentional portfolio management, as well as our proactive cash management, we remain confident that we will navigate this cycle and emerge even stronger as a more sustainable and a more profitable leader for our industry.”

Incidentally, industry analysts ascribe the downturn not so much to lower demand, but to oversupply created by new capacity coming online from major producers like China, which has pushed prices lower. Another result of the downcycle has been steep reductions in margins for olefins and polyolefins, historically LyondellBasell’s most profitable segments, with prices for polypropylene (the finished plastic) in decline.

Source: Trading Economics

Looking ahead, most analysts don’t see a strong rebound in margins in 2026 for petrochemicals (which include ethylene and propylene), although there is a growing belief that an upward turn in the cycle could begin next year (see chart below).

Source: BusinessAnalytiq

For LyondellBasell and many of its peers, the planned expansion projects that have partly contributed to the oversupply problem are now being curtailed, which in turn should help attenuate the downward pricing pressures in the coming quarters. Moreover, as the global economy continues to expand, the demand for petrochemicals and related end-markets should also improve, providing an attractive long-term opportunity for the overall industry.

Among the stocks on my watchlist right now (aside from LyondellBasell) are: Dow (DOW), Huntsman (HUN) and Celanese (CE)—all of which are major plastics producers that should benefit from an upturn in the petrochemical market.

Friday, October 24, 2025 Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 9 minutes and covers:

• Chemical makers face shrinking margins, but a rebound in the petrochemical cycle appears likely for 2026.
• Top producers in the plastics industry in particular are poised to benefit from growing global demand.
• Recent selling pressure in the precious metals arena is likely the result of profit-taking, not a reversal of the secular trend.
• Final note
  
  • AEM and PAAS should perform well in the face of rising global precious metals demand amid geopolitical worries.

Portfolio Comments

Alcoa (AA) released Q3 earnings this week featuring revenue of $3 billion that increased 3% from a year ago and a per-share loss of two cents that exceeded expectations by three cents.

Alumina production increased 4% quarter-over-quarter to 2.5 million metric tons, primarily related to higher output from the Australian refineries due to lower maintenance in the quarter. In the Aluminum segment, production increased 1% sequentially to 579,000 metric tons, primarily due to progress on the San Ciprián, Spain smelter restart.

In terms of shipments, in the Alumina segment, third-party shipments of alumina were flat sequentially at 2.2 million metric tons, with higher shipments due to increased refinery production being partially offset by decreased trading activity. In Aluminum, total shipments decreased 3% sequentially primarily due to decreased trading and timing of shipments.

Another highlight of the quarter was the Midwest premium earned on the company’s U.S. aluminum production, which more than offset the net unfavorable impact of the Midwest premium and tariff costs on imports of aluminum from its Canadian smelters to U.S. customers.

The company’s share price rallied on the mixed earnings, however, as investors’ realization that higher domestic aluminum prices have more than made up for the $69 million in tariffs on imports of the metal from its Canadian smelters.

Moreover, the rise in U.S. aluminum prices “reflects declining inventory and aluminum imports,” according to Alcoa’s management, and the company is returning to normal aluminum shipments from Canada to the U.S. after reducing deliveries earlier this year.

During the earnings call, management said the U.S. tariff on imported aluminum isn’t prompting Alcoa to spend money to restart idle production capacity at its Warrick, Indiana, smelter, saying, “it will cost us probably about $100 million and it will take 1-2 years. Tariffs can and do change over time, so we won’t be plowing $100 million into the ground based on a tariff.”

AA maintains a Hold rating in the portfolio.

****

Citi Research initiated coverage on 20 payment processors and IT service providers on Thursday, with a mix of Buy and Neutral ratings. Included among the list was BILL Holdings (BILL), which was given a Buy rating.

“Fintech and IT Service industries have been under pressure given uncertain outlooks, although we see investing opportunities in secular growth winners or companies with a clear accelerating organic growth picture on the horizon,” said Citi analyst Bryan Keane in a research note.

“In Fintech, the consumer has remained surprisingly resilient despite macro uncertainty with hopes of better clarity creating a potential uptick in transaction volumes over the mid-term while [buy now, pay later] continues to gain market share, growing well above industry averages.”

BILL maintains a Buy rating in the portfolio.

****

GE Aerospace (GE) released a stellar Q3 earnings report on Tuesday that was well received by the market. Revenue of $11.3 billion increased 26% year-on-year, with earnings of $1.66 beating estimates by 19 cents.

Management called it an “exceptional quarter” and raised full-year guidance across the board. The company specifically attributed the results to the continued success of its FLIGHT DECK operating model, which it said delivered strong services and engine output for its customers. CEO Larry Culp further credited supply chain improvements for helping the company catch up on delayed engine deliveries to Airbus and Boeing.

Breaking down the Q3 results, GE said that “orders were up 2% with solid growth in commercial services, partially offset by the timing of equipment orders in commercial equipment and defense,” noting that year-to-date orders are up 13% with services up 31%.

Total orders for the quarter were up 2%, with commercial services orders up 32%. Year-to-date, services are up 31%. CES services revenue increased 28% and internal shop visit revenue grew 33%. Spare parts revenue rose more than 25%. Total engine deliveries were up 41% year-over-year and 18% sequentially. Commercial units were up 33%.

In the key Defense and Propulsion Technologies (DPT) segment, GE said defense units were up 83% year-over-year, marking the second consecutive quarter of defense output exceeding 80% growth.

The company further highlighted a “more than 2x increase” in output from a critical supplier due to FLIGHT DECK-driven collaboration, and cited “record LEAP deliveries, up 40% year-over-year in the third quarter,” with future LEAP deliveries expected to increase more than 20% for the full year (up from the firm’s prior outlook of 15% to 20%).

Underpinning the strong quarter was robust global demand for advanced military systems and aircraft engines, with strength in global commercial air travel also contributing. For the full year, GE now forecasts earnings of $6.10 a share at the midpoint, revenue growth in the high teens and free cash flow up to $7.3 billion (up $500 million at the midpoint).

GE maintains a Hold rating in the portfolio.

****

Goodyear Tire & Rubber (GT) announced on Wednesday the launch of three new all-terrain tires designed for SUVs, light trucks, work vans and electric vehicles.

The new lineup includes the Wrangler Outbound AT, Wrangler Workhorse AT 2, and Wrangler ElectricDrive AT, each targeting specific vehicle segments and usage conditions.

The new product lineup aims to strengthen Goodyear’s position in the growing all-terrain tire segment, addressing increasing consumer demand for versatile performance across various driving conditions and vehicle types.

GT maintains a Buy rating in the portfolio.

****

Intel (INTC) released Q3 earnings results after the market closed on Thursday. CEO Lip-Bu Tan said the results “reflect improved execution and steady progress against our strategic priorities.”

Revenue of nearly $14 billion increased 3% from a year ago, while earnings of 23 cents a share beat estimates by 22 cents.

Sales, EPS and gross margin all came in above guidance levels, marking the fourth consecutive quarter of improved execution delivered by the underwriting growth in Intel’s core markets, highlighting “the steady progress we are making to rebuild the company,” said Tan.

Tan further emphasized the improvement in the firm’s cash position and liquidity, citing “accelerated funding from the United States government, important investments from Nvidia (NVDA) and SoftBank Group and monetizing portion of Altera and Mobileye (MBLY).”

Intel sees AI as being a primary driver going forward, with Tan stating that “AI is clearly accelerating demand for new compute architectures...and it is a strong foundation for sustainable long-term growth as we execute.” He emphasized the new partnerships, including the collaboration with Nvidia, which he said would “create a new class of products and experience spanning multiple generation that accelerate the adoption of AI.”

The company also announced organizational changes, including the creation of the Central Engineering Group, designed to unify Intel’s horizontal engineering functions to drive leverage across foundational IP development, test chip design, EDA tools and design platforms.

Tan also confirmed the company remains on track to “rightsize the company by year-end,” as well as launch the first Panther Lake SKU by year-end, with additional SKUs in the first half of 2026.

On the liquidity front, Intel said it executed on deals to secure roughly $20 billion of cash, including three “important strategic partnerships,” and exited Q3 with $31 billion in cash and short-term investments.

Looking ahead, Intel forecasted revenue to range between $12.8 billion to $13.8 billion which, if realized, would be roughly flat sequentially at the midpoint but down 6% year-on-year.

INTC maintains a Hold rating in the portfolio.

****

Kenvue (KVUE) has begun to counter recent efforts by the U.S. federal government to change the labeling of Tylenol (acetaminophen) after the Trump administration in September linked the painkiller to a potential increase in the risk of autism in a child if taken during pregnancy.

The Food and Drug Administration (FDA) said it would begin a process to change Tylenol’s label to reflect the risk, although it pointed out that a “causal relationship has not been established and there are contrary studies in the scientific literature.”

Seeking Alpha noted that some consumer advocacy groups want the FDA to take a “tougher stand” on the acetaminophen issue, stating: “The Informed Consent Action Network, a prominent anti-vaccine organization, has filed a Citizen Petition with the agency asking that Tylenol’s label contain a warning that use during pregnancy could lead to an increased risk of autism and ADHD in the child.”

In response to the Citizen Petition, Kenvue recently filed a response, arguing against the need to add a pregnancy/autism risk warning for Tylenol given that the “overwhelming weight of the evidence contradicts the existence of any such risk.”

Kenvue added:

“Consistent with the body of evidence, numerous leading professional organizations— including the American Academy of Pediatrics, the American College of Obstetricians and Gynecologists, the American Psychiatric Association, and the Society for Maternal-Fetal Medicine—have independently reviewed the science and concluded that there is no causal association between acetaminophen use during pregnancy and neurodevelopmental disorders.”

In other company-related news, activist investor Starboard Value CEO Jeff Smith said that he is “thrilled to own” Kenvue, even though the stock is down by around 30% year-to-date. The company joined Kenvue’s board in March as part of a proxy fight settlement.

Speaking on CNBC at a recent investor summit in New York, Smith said, “It was cheap a year ago. It’s cheaper now...Am I thrilled to own it at this valuation? Yes.”

He added that some of Kenvue’s brands and business lines have improved compared to a year ago.

KVUE maintains a Buy rating in the portfolio.

****

The stocks of major gold and silver miners sold off earlier this week after the gold price saw its biggest single-day decline since 2013, while silver prices also fell sharply.

Serving as a benchmark for the sector’s losses, the VanEck Gold Miners ETF (GDX), which tracks leading miners, fell nearly 10% on Tuesday in what was its worst session since the market turmoil of March 2020.

Among the casualties were Cabot Turnaround Letter portfolio incumbents Agnico Eagle Mines (AEM) and Pan American Silver (PAAS), which fell 12% and 15%, respectively, before recovering somewhat later in the week.

Per Seeking Alpha, “Analysts attributed the sharp pullback to a stronger U.S. dollar, which makes bullion more expensive for buyers using other currencies, and to easing demand for safe-haven assets as geopolitical and trade concerns temporarily cooled, according to several news reports.”

Also blamed as a catalyst for the mining sector correction was a reduction in defensive bets ahead of next week’s planned meeting between President Donald Trump and Chinese President Xi Jinping, which many investors see as having the potential to improve strained trade relations between the U.S. and China.

Also blamed for the fall in precious metals prices were seasonal buying factors in India, one of the world’s largest gold consumers, as demand for the metal has declined ahead of an important festival season demand.

However, the most likely culprit for the sell-off was simple profit-taking after both metals—and several precious metals mining stocks—had accelerated in a nearly vertical (and unsustainable) fashion over the last few weeks. I view the dominant intermediate- and longer-term bullish trends for both metals to still be intact despite the latest market-related turmoil.

Supporting this view was a recent research note from Scotiabank, which sees gold and silver prices continuing to rise “amid persistent economic and geopolitical uncertainty and continued central bank buying,” which it said should benefit gold miners over streamers.

What’s more, the bank lifted its gold forecasts to $3,450 an ounce for 2025 and $3,800 for 2026, up from $3,250 and $3,200 previously. Long-term estimates, from 2029 onward, rose to about $2,600 from $2,300. Silver forecasts were also increased, with 2025 now seen at $38.50 an ounce, up from $34.50.

Scotiabank’s top mining picks included Agnico Eagle, which it said should benefit from the fact that equities in the sector still offer value, trading at a roughly 25% discount to bullion with free cash flow yields of about 6% based on 2026 estimates.

Scotiabank’s model further put the fair value of gold around $2,750 an ounce, which suggests that current prices are nearly 30% above equilibrium levels due to “lingering concerns over global growth, debt and tariffs.”

For silver in general (and Pan American Silver in particular), the demand-related catalysts for the white metal—including its uses in electric vehicles, data centers and solar farms—remain intact, with tightening supplies in London and Shanghai vaults still a key supply-related factor.

Both AEM and PAAS maintain Hold ratings in the portfolio.

****

Sirius XM Holdings (SIRI) declared a 27-cent per-share quarterly dividend on Thursday, in-line with the previous one. The forward yield is 5% and is payable on November 21 for shareholders of record November 5.

The company will release its Q3 earnings next Thursday, pre-market.

SIRI maintains a Buy rating in the portfolio.

****

SLB Ltd. (SLB) last Friday released Q3 financial results that played out in line with the firm’s expectations as revenue increased sequentially, supported by two months’ additional ChampionX revenue, plus further growth in the Digital segment and a “resilient performance” of its core business.

SLB further said it “improved revenue despite the backdrop of a fully supplied oil market, an uncertain geopolitical environment and subdued commodity prices.”

Revenue of $8.9 billion was down 3% year-on-year, but up 4% sequentially. Earnings of 69 cents beat estimates by two cents.

Other metrics saw cash flow from operations of $1.7 billion decline 31% from a year ago and free cash flow was $1.1 billion drop 39%, including $153 million of acquisition-related payments.

However, the company was sanguine and guided for improvements going forward, including a deepwater outlook that management said “remains easier to stay and easier to grow as a market.” Concerning the Saudi Arabia outlook, SLB said, “We have reached a stabilized activity, if not bottom” while anticipating a likely rebound in the near-to-midterm, and with increased activity expected for the first half of 2026 for both gas and oil.

On the shareholder returns front, SLB repurchased 3.2 million shares of its common stock in Q3 for a total purchase price of $114 million. For the first nine-months of 2025, SLB repurchased a total of 60 million shares of its common stock for a total purchase price of $2.4 billion.

Going forward, SLB has set its sights on achieving a sequential increase in results in Q4 of “high single-digit top line growth as we report a full quarter of ChampionX and generate seasonally higher year-end Digital and product sales.”

Fourth-quarter adjusted EBITDA margin is expected to expand around 1% sequentially, while the Digital Division is expected to achieve “double-digit growth year-on-year with EBITDA margin reaching 35% on a full year basis.”

In the wake of the earnings report, SLB received several new share price upgrades from Wall Street institutions, including an upgrade from Piper Sandler from Neutral to Overweight. The ratings improvement was in part predicated on SLB’s improving Saudi Arabia outlook, which Piper Sandler called “a significant improvement for its rate-of-change story,” in view of the company’s size and scale in that country.

And while Deepwater offshore has been a headwind for SLB’s earnings in recent quarters, the investment bank said that while an “inflection is not expected until mid-to-late 2026,” SLB’s management believe the company’s “healthy pipeline with favorable economics” (due to a number of final investment decisions planned for 2026 and early 2027) should help improve the outlook for that segment.

SLB maintains a Buy rating in the portfolio.

****

Solventum (SOLV) announced on Tuesday the appointment of Heather Knight as Chief Commercial Officer, effective November 10.

In this newly created role, Knight will oversee global commercial and R&D operations across the company’s MedSurg, Dental Solutions and Health Information Systems segments, reporting directly to CEO Bryan Hanson.

Knight brings over 30 years of leadership experience in the MedTech industry. She most recently served as Chief Operating Officer at Baxter International, where she led global sales across three business segments, as well as R&D, supply chain, and medical and regulatory affairs.

SOLV remains a Buy rating in the portfolio.

****

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at cdroke@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.

Portfolio

Copyright © 2025. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.