The global specialty chemicals industry hardly seems like a thrilling investment, with an annual projected growth of only 3.8% over the next five years. But the industry holds vast potential for Omnova Solutions (NYSE: OMN), a specialty chemicals maker we added to the Growth Stock Strategist portfolio in mid-August.

The firm, founded nearly two decades ago, is a force in many specialty chemicals markets and is poised to outperform the overall industry. Plus, it has strong demographic trends behind it. Together, these factors could mean annualized 30% profit growth over the next five years—and that is thrilling.

Although Omnova missed estimates for the June quarter, we are sticking with our $15 target, which is an 87% increase above its current price. Those missed estimates were due to a delay in a plant build-out by one of its large customers, causing a shortfall in orders, but that plant should be back online by year-end.

Great Promise

Omnova’s two business segments, performance chemicals and engineered surfaces, both hold great promise. Performance chemicals, the larger of the two (about 75% of the company’s revenue, which totaled $838 million last year), should profit from a broad line of products for the industrial, consumer goods, energy and construction sectors.

Among these products are protective coatings, resins and adhesives incorporating various types of plastic, as well as organic or chemical agents. The segment also sells wear-resistant industrial rubber and the additives that make rubber more durable.

As the growth of cities increases around the globe, especially in emerging markets, we expect strong demand for many performance chemicals products such as waterproofing resins, which are in many construction materials including concrete coatings, interior paint and moisture sealers. The worldwide market for waterproofing agents is expected to compound about 12% annually to nearly $31 billion in five years. While the strongest growth for Omnova will come from more infrastructure and higher construction standards in emerging markets, growth will also be supported by slower but still solid demand in mature North American and European economies.

Business should also be brisk in packaging additives, a market projected to expand 5.5% a year to nearly $5 billion in 2020, thanks in large part to rising demand for packaged goods in the Asia-Pacific region. To capitalize on this demand, the performance chemicals division offers a line of additives that make food and beverage packaging stronger and more resistant to moisture and cold.

Yet another promising area for the segment: rubber additives, a business that analysts say will expand 5.4% annually to $4.8 billion in 2020. The segment makes antioxidants and other rubber-strengthening agents that are used in the auto industry, which is booming in the Asia-Pacific region, the world’s fastest growing. Germany’s car industry is on the upswing, too.

Dynamic Film Business

There’s also abundant opportunity for Omnova’s engineered surfaces segment, which makes specialty coatings, laminates and custom rigid, semi-rigid and flexible surfacing films. The segment has customers in the automotive and commercial and residential construction industries. It also serves the mass transit, manufactured homes and home furnishings markets.

This segment came in below expectations in the third quarter due to project delays at a few customers. One, which uses Omnova’s surfacing chemicals in flooring products, suffered a delay while adding capacity at a new manufacturing plant. The rest of the shortfall was caused by delays in a retailer’s refurbishing project. Both customers are expected to ramp up orders by year-end.

The segment’s heavy-duty polyurethane and vinyl-coated car upholstery fabrics should prove highly profitable. Analysts see the global market for automotive coatings expanding about 7% annually, reaching more than $16 billion in 2021. The mass transportation, healthcare and hotel industries will also need sturdy coated fabrics, mainly for seating.

With the global construction industry projected to expand at an annualized 5.5% rate through 2021, thanks mainly to growth of emerging economies, the engineered surfaces segment stands to gain through strong sales of surface laminates. Construction-related products with these laminates include floor and ceiling tiles, wall coverings and manufactured housing interiors.

More building naturally boosts demand for home furnishings, a market that should match the construction industry’s projected growth. Omnova’s engineered surfaces segment also makes coated fabrics for residential furniture upholstery. As construction activity rises, so should the demand for the segment’s protective kitchen and bathroom cabinetry laminates.

Although the segment is apt to get a good chunk of future growth in developing countries, mature North American markets will contribute to the company’s earnings. The developing world’s robust recreational vehicle market is expected to compound at 4.1% to more than $20 billion in 2020. According to the Recreation Vehicle Industry Association, Americans bought more than 374,000 RVs last year. Based on shipment data through July, sales are set to jump 17% to more than 436,000 this year.

And Omnova’s engineered surfaces segment will be right there to benefit, providing laminates and other surfacing products the industry needs to deck out RV interiors.

More Progress

Product development and marketing should ensure Omnova keeps gaining ground in the choicest areas of specialty chemicals. In the second quarter, for example, the firm launched a new binding resin for use in the construction sector. In paints and coatings made for restoring worn buildings, the resin improves adhesion, keeps most moisture out and hinders further decay.

These new specialty chemicals produce much higher profits for manufacturers.

 Companies like Omnova and Stephan (NYSE: SCL), a prior holding in the Growth Stock Strategist portfolio, are growing in profitability even though revenue is declining.

This year Omnova launched a new surface guard that makes polished concrete floors in commercial buildings easier to maintain. The firm’s new high-performance commercial roofing adhesive positions it for growth in the global roof coatings market, which analysts see expanding nearly 6% a year through 2020.

Omnova continues to win new business, adding several big retailers to its list of customers for store fixture laminates and boosting sales of high-end vinyl flooring tile, another hot market expected to compound about 11% annually the next four years to $77 billion worldwide.