LyondellBasell is a chemical company that trades at just 8.5x its 10-year average free cash flow. LyondellBasell stock (NYSE:LYB) appears to be cheap for three reasons: the market expects the current commodity chemicals downturn to continue, many ESG-friendly funds cannot own a stock like LYB, and LyondellBasell does not sell exciting, new-age products. I don’t believe these are compelling reasons for a long-term investor to sell LYB. Let me explain why I’m bullish on the stock.
First off, one of LYB’s main markets, Europe, has already experienced a softening economy. Downturns like this are typically a good time to buy fundamentally strong cyclical stocks. Next, the company is beginning to produce innovative, recycled products. LYB should improve its environmental impact by leaps and bounds in the years ahead. Lastly, LyondellBasell is poised to benefit from the increasing use of its materials in growth categories like electric cars, food packaging, and solar panels.
The Current Chemicals Downturn
Currently, commodity chemical companies are facing challenges in China and losing money in Europe. As a result, LyondellBasell’s cash flow from operating activities has fallen by 44% since 2021. This sort of thing can occur when input costs are high and demand is weak.
However, LyondellBasell has advantaged input costs or “feedstocks” in North America and is also securing an advantaged position in the Middle East. This cost advantage allows LyondellBasell to remain highly profitable, even during challenging times. The company produced $3.4 billion of free cash flow last year. This compares to $2.5 billion for Dow Inc. (NYSE:DOW) and $3.3 billion for BASF SE (OTC:BASFY), chemical companies with substantially larger market caps.
LyondellBasell also has the financial fortitude to weather this downturn. The company has been building up its cash position recently and now has a current ratio of 1.85x. The company’s debt also looks manageable, with $7.83 billion of net debt compared to adjusted EBITDA of $5.2 billion.
A Compelling Growth Runway
Despite LYB’s cheap valuation, the company appears poised to grow. At last year’s capital markets day, LyondellBasell set lofty growth expectations, as you can see below.
While $23 of 2027 diluted EPS looks ambitious to me, LyondellBasell has some compelling growth drivers. First, LyondellBasell’s core plastics end…