LyondellBasell Industries N.V.’s LYB consistent focus on HDPE project and the proposed buyout of A. Schulman bode well for the company. Evidently, it registered a year-over-year gain in top line over the past few quarters, courtesy of these strategic initiatives.
In the past six months, the company’s shares have gained 12.1% compared with the industry’s decline of 1.7%. Yet, maintenance outages and raw material pricing pressure raise concerns. Let’s delve deeper.
Key Catalyst
LyondellBasell remains on track with the construction of an HDPE plant on the U.S. Gulf Coast that will employ its proprietary Hyperzone PE technology. Also, it is constructing a world scale plant on the U.S. Gulf Coast for producing propylene oxide (PO) and tertiary butyl alcohol (TBA). The plant will have annual capacity of 1 billion pounds of PO and 2.2 billion pounds of TBA and its derivatives. A major part of the company’s growth investment for 2018 (roughly 55% of total capital spending of $2.4 billion) will be allocated to these projects.
LyondellBasell’s expected buyout of A. Schulman for $2.25 billion will create a premier global provider of advanced polymer solutions with extensive geographic reach, leading technologies and a diverse product portfolio. A. Schulman is a leading supplier of high-performance plastic compounds, composites and powders. The deal will double the size of LyondellBasell's existing compounding business and create a platform for future growth, with reach into additional high-growth markets such as packaging and consumer products, electronics and appliances, building and construction and agriculture. LyondellBasell expects to realize cost synergies of $150 million within two years. The buyout is also expected to be accretive to earnings within the first full year, following its closure.
LyondellBasell remains committed to deliver greater value to its shareholders leveraging healthy cash flows. It bought back 10 million shares in 2017, returning $866 million to its shareholders. LyondellBasell also recently raised its quarterly dividend by 11%. It generated operating cash flows of more than $1 billion in the most recently reported quarter.
Concerns
Of late, interruptions, including maintenance outages, have been hurting the company’s production capacity and results. First-quarter 2018 results were affected by loss in production due to a planned maintenance on one of its two crackers at the Channelview facility. The company incurred a loss of around $50 million and expects another $50 million impact in the second quarter.
The company is hurt by weak ethylene prices that continue to weigh on its U.S. olefin margins. Strong industry supply and higher inventory have led to weak ethylene pricing environment over the past few months.
LyondellBasell is facing headwinds related to volatility in raw material and energy costs that account for a major portion of its operating costs. Higher feedstock and energy costs led to a 15% year-over-year increase in its cost of sales in the last-reported quarter. The company saw a rise in propylene feedstock costs in the quarter.
Zacks Rank & Stocks to Consider
LyondellBasell currently carries a Zacks Rank #3 (Hold).
Some better-ranked companies in the basic materials space are FMC Corporation FMC, Huntsman Corporation HUN and The Chemours Company CC. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
FMC Corp has an expected long-term earnings growth rate of 13.6%. Its shares have gained around 22.2% over a year.
Huntsman has an expected long-term earnings growth rate of 8.3%. Its shares have moved up around 27% over a year.
Chemours has an expected long-term earnings growth rate of 15.5%. Its shares have gained around 20% over a year.
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