LyondellBasell, DuPont Nearing 30% Rise

Includes: DD, LYB
by: Takeover Analyst

As the global industrial economy picks up, the Street is getting bullish on chemicals. LyondellBasell (NYSE:LYB) is currently rated a "strong buy" while DuPont (NYSE:DD) is rated a "buy" on the Street. Trends are picking up in both companies whether it's on the macro side, takeover side, or organic side. Based on my multiples and DCF model, I find strong upside for both companies.

From a multiples perspective, LyondellBasell is the cheaper of the two. It trades at a respective 8.2x and 9.7x past and forward earnings with a dividend yield of 2.3%. DuPont trades at a respective 14.1x and 10.8x past and forward earnings with a dividend yield of 3.2%.

At the third quarter earnings call, LyondellBasell's CEO, Jim Gallogly, noted solid performance:

All of our business segments continued to perform well during the quarter and our plants operated well. Perhaps the best example of this was the Houston refinery which operated at designed through-put, benefited from smart crude buying and generated record profits. During the quarter the only significant plant reliability impact on earnings was approximately $20 million from the residual impacts of the second quarter Morris plant power supply outage.

Reliable operations typically go hand-in-hand with excellent safety performance and strict cost control. The third quarter was no exception.

Feedstock price trends are now starting to improve with ethane and propane becoming cheaper. Not only are margins growing, but utilization rates are simultaneously improving. On the other hand, I am bullish about a turnaround in natural gas prices due to regulatory headwinds on other energy sources. In the even that natural gas prices start to improve, LyondellBasell's cost advantage will be weakened. But for the current moment, LyondellBasell is undergoing a solid turnaround right now as commodity spreads widen. Double-digit free cash flow yield and financial shape are further solid.

Consensus estimates for LyondellBasell's EPS forecast that it will grow by 107.9% to $5.01 in 2011, decline by 7.4% in 2012, and then grow by 19.2% in 2013. Assuming a multiple of 13x and a conservative 2012 EPS of $4.58, the rough intrinsic value of the stock is $59.54, implying 32.9% upside.

Meanwhile, volumes are dramatically picking up at DuPont. Third quarter posted double-digit growth rates in all segments. Pioneer has further had stellar performance that is helping to transition the firm more into the ag market. Towards that end, the acquisition of Danisco is helping to boost margins and momentum against competitive food players. With large exposure to emerging markets - roughly one-third of the business - DuPont also offers more safety than what the market acknowledges.

Consensus estimates for DuPont's EPS forecast that it will grow by 8.7% to $4.27 in 2012 and then by 12.6% and 11% in the following two years. Modeling a CAGR of 10.8% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $67.98, implying 30.7% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.