Low natural gas prices have provided a huge tailwind for chemical companies as natural gas can comprise 15% to 25% of chemical firms operating costs. One of the best performers in my portfolio over the last six months, Dow Chemical (DOW), is up some 50% since I profiled it back in October. Another stock that has benefited from this trend, especially with its facilities in North America, is LyondellBasell (LYB). It has attractive valuations and has further appreciation ahead of it.
LyondellBasell Industries - "LyondellBasell Industries N.V. manufacturers and sells chemicals and polymers, refines crude oil, produces gasoline blending components, and develops and licenses technologies for the production of polymers." (Business Description from Yahoo Finance).
Seven reasons to pick up LYB at under $42 a share:
- Insiders have bought over 6 million shares in the last six months.
- T.Rowe Price believes the company has long term earnings potential of $8 a share.
- It paid out over $5 a share in dividends last year, most in a special dividend that was issued in November for $4.50. It also doubled its quarterly dividend to 20 cents a share during the year. Given its rising cash flow (see below), I would look for the company to continue to reward shareholders.
- The company has recovered well from the recession after coming out of bankruptcy. It went from negative operating cash flow in FY2009 to almost $3B in operating cash flow in just completed FY2011. The company sells for less than 9 times operating cash flow currently.
- Its refining business (About 1/3 of revenues) is showing the positive impacts of better crack spreads. Its Houston refinery is running at 93% capacity.
- LYB sells for less than 50% of annual revenues and 11.5 times forward earnings.
- LyondellBassell is a core holding at many savvy hedge funds, private equity firms and money managers including Apollo Global Management, Highbridge Capital Management and Afton Capital Management. Hedge funds own 34% of the company. Jefferies just upped its price target to $50 on LYB as well. Given an improving economy and continued low natural gas prices and increasing crack spreads, this should be the first of many price target increases by analysts on this company.
Disclosure: I am long DOW.