Bull of the Day: LyondellBasell (LYB) - Bull of the Day

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Earnings estimates have been soaring for LyondellBasell ( LYB ) following the company's strong Q2 report. It is a Zacks Rank #1 (Strong Buy) stock.

Based on consensus estimates, analysts are projecting solid double-digit EPS growth for LyondellBasell both for this year and next year. Despite this, shares trade at less than 13x forward earnings. While shares have made strong gains so far this year, there seems to be plenty of upside potential left.

LyondellBasell is a global plastics, chemicals and refining company that was incorporated under Dutch law on October 15, 2009. It reports its operations through five segments:

  • Olefins and Polyolefins - Americas (26% of total sales in 2013)
  • Olefins and Polyolefins - Europe, Asia and International (30%)
  • Intermediates & Derivatives (19%)
  • Refining (24%)
  • Technology (1%)

Its end markets are diverse and include packaging, electronics, automotive parts, home furnishings, medical supplies, construction materials and biofuels. LyondellBasell has a market cap around $56 billion.

The Olefins and Polyolefins - Americas segment has been a major profit growth driver for LYB over the last couple of years as its margins have expanded greatly thanks to lower raw material costs.

Second Quarter Results

LyondellBasell delivered excellent second quarter results on July 25. Adjusted earnings per share came in at $2.22, crushing the Zacks Consensus Estimate of $1.92. It was a whopping 29% increase over the same quarter last year.

Sales rose 9% to $12.117 billion, which was well ahead of the consensus of $11.310 billion. LyondellBasell saw top-line growth in each of its major segments. Operating income from continuing operations jumped 18% due to particular strength in the company's Olefins and Polyolefins- Americas segment.

Meanwhile, operating cash flow surged 44% year-over-year. This allowed the company to buy back a ton of stock. LyondellBasell bought back approximately 19 million shares in the quarter, completing its initial 10% share repurchase authorization. The company has already initiated purchases under its second 10% authorization.

Estimates Rising

Following strong Q2 results, analysts revised their estimates significantly higher for both 2014 and 2015, sending the stock to a Zacks Rank #1 (Strong Buy). You can see the sharp increase in estimates in the company's "Price & Consensus" chart:

The 2014 Zacks Consensus Estimate has increased from $7.39 just 30 days ago to $8.01. The 2015 consensus is currently $9.13, up from $8.50 over the same period. Based on these consensus estimates, analysts are projecting 19% EPS growth this year and 14% growth next year.

Reasonable Valuation

Shares of LYB are up more than 37% year-to-date, but the valuation picture still looks reasonable. Shares trade at less than 13x 12-month forward earnings, below the industry median of 15x. And its price to cash flow ratio is 11.

Its price to book ratio of 5.3 is above its peers, but that's more than justified by its superior returns on equity, which has recently been north of 30%.

On top of this, LyondellBasell pays a dividend that yields 2.6%. The company recently increased its dividend by 17% and has increased it six times over the last three years. It has also paid out two generous special dividends over that period too. LyondellBasell paid out approximately 35% of its free cash flow in dividends over the last 12 months. So it has plenty of room to continue raising that dividend in the future.

The Bottom Line

With stellar earnings momentum, strong growth projections, reasonable valuation and a solid dividend yield, LyondellBasell still offers investors attractive total return potential.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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