Wall Street Q3 earnings estimates too high for ethylene-exposed Dow, LyondellBasell – analyst

NEW YORK (ICIS)–Wall Street consensus earnings estimates for the third quarter are too high for certain ethylene-exposed chemical companies, an analyst said on Monday.

“One of our main tactical calls for H2 2020 remains reversal of the recent strength in ethylene/PE (polyethylene) chain. We note that ethylene prices in Asia dropped 9% last week, the first decline in 10 weeks,” said Aleksey Yefremov, analyst at KeyBanc Capital Markets, in a research note.

While the analyst said Dow is executing well on the sale of non-core assets, costs and securing more ethane for its Sadara joint venture, his forecast for Q3 earnings before interest, tax, depreciation and amortisation (EBITDA) is $1.09bn – 12% below consensus of $1.24bn. For 2020, he forecasts EBITDA of $4.65bn, which is 5% below consensus of $4.91bn.

“We expect ethylene/PE tightness to abate in coming months, reversing one of the biggest upside surprises of the recent months,” said Yefremov.

For LyondellBasell, the analyst’s Q3 EBITDA estimate of $871m is 10% below consensus of $946m while his full year 2020 forecast of $3.58bn is 4% below consensus of $3.74bn.

The KeyBanc analyst’s earnings per share (EPS) estimates are far more pronounced to the downside. For example, Yefremov’s Q3 EPS estimates are 50% below consensus for Dow and 20% for LyondellBasell.

The analyst is much more positive on Axalta Coating Systems, Eastman and DuPont, raising Q3 earnings estimates on the companies, “mostly due to a better outlook for miles driven, construction, and auto OEM end markets”.

Overall, he doesn’t see much upside to Q3 consensus earnings estimates and is “not in a rush” to increase exposure to chemical stocks ahead of Q2 earnings season.

“Within the first four to eight weeks following Q1 2020 earnings, most management teams have been providing more optimistic updates. This trend has been less apparent in the last few weeks, possibly because outlooks are again less clear due to flattening out direction of high-frequency macro and worsening coronavirus data in the US,” said Yefremov.

Focus article by Joseph Chang

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