FocusUS chemical stocks defy weak outlook

09 August 2012 23:16  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--If the chemical cycle is headed towards a trough, you wouldn’t know it from the stock prices.

Shares of two of the most heavily weighted commodity chemical names traded on the New York Stock Exchange – Netherlands-based LyondellBasell and US-based Westlake Chemical, surged to all-time highs this week.

Shares of LyondellBasell hit a record high of $47.44 on 8 August. For the year, the stock has gained 46%. Westlake also hit a record high of $69.86 on 7 August, racking up year-to-date gains of 74%.

Both reported strong second-quarter earnings, benefiting from low US natural gas liquids feedstocks.

LyondellBasell’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 11.4% year on year to $1.77bn (€1.43bn) in the second quarter.

LyondellBasell’s Olefins and Polyolefins – Americas segment led the way with a 47% gain in EBITDA to $847m.

The US natural gas liquids (NGL) feedstock advantage lifted Westlake’s olefins profits to record levels, while its vinyls earnings also improved on lower feedstocks.

Net income for Westlake jumped 43% to $115.5m in the second quarter. The olefins segment income from operations rose 17.4% to $155.9m.

Buffeting the companies from any downturn are their rock solid balance sheets – atypical of capital intensive, cyclical companies.

Westlake had net cash of $346m on its books at the end of the second quarter, while LyondellBasell clocked in with just $2.4bn in net debt.

LyondellBasell’s debt level is easily manageable for a company that generated $3.1bn in EBITDA in just the first half of 2012.

Shares of US-based Eastman Chemical, Georgia Gulf and TPC Group have also roared ahead in the past few weeks.

Investors are encouraged that firms can maintain strong earnings in tough times. And if profits remain high today, imagine the upside when the economic tide inevitably turns.

And while the stocks have made huge moves this year, there could be plenty of room to run, said Hassan Ahmed, an analyst at investment advisory firm Alembic Global Advisors.

“Our analysis suggests that we are in the early innings of a cyclical upswing and even barring a normal global economic environment, all US ethylene names could potentially double from current levels in the medium-term,” he said in a research note on 6 August.

Analysing consensus earnings-per-share forecasts during the prior three peaks in the commodity chemical cycle highlights that analysts have consistently underestimated companies’ peak earnings power by 186% on average in the two years prior to a peak and by 60% one year prior, noted the analyst.

“This to us suggests that there may still be substantial room, from current levels, for positive earnings revisions and in-turn, a share price rally for US commodity chemical names,” said Ahmed.

The analyst has an “overweight” rating for three US companies most heavily exposed to ethylene – Dow Chemical, LyondellBasell and Westlake.

($1 = €0.81)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joseph Chang
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