Energy Crisis Creates Opportunity in German Chemical Stocks

The energy crisis in Europe and its associated impact on the economy has caused the European chemical sector to trade off hard this year. Indeed, the European chemical companies under our coverage are down 21% compared with down 10% for the Morningstar Europe Index. While nearly all the European chemical stocks we cover are showing negative returns this year, we favor the more cyclical companies for investors at this point, particularly the German ones, as their position in the epicenter of energy and recession concerns has resulted in their trading at deeply discounted levels. We don't think gas rationing in Germany is likely this winter, but we model a recession in Europe and a global slowdown in 2023 with below-consensus estimates. Despite this relatively pessimistic view, BASF (narrow moat), Covestro (no moat), Evonik (no moat), and Lanxess (no moat) are all trading at 4- and 5-star levels. Lanxess is our preferred stock of the bunch, given its bargain-basement valuation (0.52 price/fair value estimate), manageable exposure to a gas shortage, and multiple avenues for investors to win (for example, rerating after its transformation into a full specialty chemical company and its potential lithium joint venture with Standard Lithium) other than just waiting for a cyclical recovery.