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Seize the Moment with LyondellBasell

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  • Founded in 2005 - now the 3rd largest independent chemical company in the world
  • EBITDA Growth before 'lower of cost or market' (LCM) adjustment of 23.75% (11.71% after LCM)
  • Share repurchase programme in 2014 of $5.788 billion representing 12% of the shares outstanding
  • Average price paid in share repurchase programme of $ 91.87 - a 25% discount from our Fair Value
  • New share repurchase programme is discretionary based on surplus cash generated - see company cash priorities below
  • Dividend increased to $2.70 (3.18% at current price)
  • Management anticipate that margins will ease from the 2014 records however they are focussed on generating further growth and keeping fixed costs flat
  • The share price has tracked the general slide in oil and commodity prices
  • This quality stock pays a dividend and holds good long term returns for the patient investor

LyondellBasell Industries (NYSE: LYB) released it's Q4 results on the 3rd Feb 2015. The full year EBITDA has grown at a very healthy 11.71% after taking a $760 million non-cash charge for the impact of a LCM inventory adjustment ( $455 million after-tax ). This is driven by accounting standards and is largely driven by the price of crude oil. Given that there is a new CEO at the helm this may be a case of 'kitchen sinking' to allow for a positive surprise during the year.

The management team are not deviating from their core 3 point strategy which is to:

  1. Focus on growth opportunities where they have competitive advantages
  2. Capture these opportunities quicker and at a lower cost than the competition
  3. Growth through disciplined capital spending and advantaged cost position

At STRIDE we estimate that the business will keep enjoying a growth rate of about 10%. This is based on their historical growth compared to our forecasts which recognises LyondellBasell's very focussed and disciplined capital spending. For more info on how we calculate this please take a look at the scores and ratings video. The new management team led by Bob Patel have reaffirmed that they are focussed on driving further growth during 2015 and beyond.

Shareholder value creation

LyondellBasell have a very disciplined cash model which prioritises the Capex, Interest and Dividend over Growth Capex, Acquisitions and Share Repurchases.

LyondellBasell-CashDeployment

 

 

We like the very focused approach that the management team are taking in this regard. Given the large discount to fair value that the shares are trading at, we hope the management team find additional cash during 2015 to take advantage of the depressed share price. Despite purchasing 12% of the shares off the market - the share price has only risen 5.9% since the previous year end close.

The 3.1% dividend yield is also attractive for investors wanting some income.

STRIDE Scores

STRIDE scores for the business are looking good. For more info on how the scores work, take a look at the scores and ratings video.

LyondellBasell-STRIDEScores

 

The strength rating is 89 and we can see that the Z-score reflects the safety and relative strength of this business. Liquidity and solvency ratios are all fantastic and the business is prudently run with a great net working capital / net current asset position.

 

LyondellBasell-BalanceSheet

The timing rating of 42 shows that the business has traded down slightly but has been pretty flat.

The returns score is 78 and we can see that this is reflected in the Greenblatt rank / Magic Formula investing position. Returns across the business are good and rising:

LyondellBasell-Ratios

The intrinsic value score of 34 is on the low side - True Book Value per share of $ 16.02.

The dividend score is 81 - the dividend is stable, growing, affordable and financed from free cash.

Earnings predictability is 100 - our highest rating - the business has continued to grow the revenue along with the gross and net profit all at a income statement and per-share level.

STRIDE Valuation

Our fair value comes in at ~$123. The business consistently traded in a band between our consider buy and fair value until October 2014 when the share price weakened considerably. This is a business that seems unloved by the market (PE Ratio of 10.64) even though it produces stable growing profits. As stated previously our forecast growth number is just over 10%. The management team have reiterated their intentions to keep the business growing and rewarding its shareholders.  We consider the current price to be below our required entry point of $99 - a 20% discount to our fair value of $123.  This would give us a decent margin of safety. The consider sell price is dictated by our RISE factor - more on this in our detailed analysis video.

LyondellBasell-CompanyInfo

LyondellBasell-Valuations

STRIDE Financials

Income statement show revenue  has been stable and gross profit / net income have been growing as depicted below. This despite the LCM effect.

LyondellBasell-IncomeStatement

The balance sheet is stable and the company looks to distribute excess cash back to shareholders firstly through dividends and then by share repurchases.

LyondellBasell-BalanceSheetVisual

The cash flow is stable and the company only retains as much cash as it needs to operate after returning a $7.2 billion to shareholders.

LyondellBasell-CashFlow

Conclusion

Currently, LyondellBasell is on our watchlist due to our timing score. For more info on how the timing scores work, take a look at the scores and ratings video. At STRIDE our price alerting sends an email once a share moves through a price target. This is a quality business that delivers on its business plan and is incentivised to reward its shareholders.  We are watching the shares very closely to see a good entry point when the engine sees the price start rising again. 

 

Topics: Valuation

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