Strategic Shift To Circular Polymers And High Margins Sparks Future Growth Potential

Key Takeaways

• Strategic investments in advanced recycling and circular polymers could enhance profit margins and respond to growing demand for sustainable materials.
  
• Shifting focus from refining to high-margin, low-carbon sectors and optimizing operations in Europe may streamline focus and improve net earnings.
  
• Declining crack spreads, uncertain European demand, refining exit impacts, competition, and unreliable stimulus effects pose risks to LyondellBasell's earnings and market position.

Catalysts

Operates as a chemical company in the United States, Germany, Mexico, Italy, Poland, France, Japan, China, the Netherlands, and internationally.

• LyondellBasell's investment in the MoReTec-1 facility in Germany, which utilizes proprietary catalytic advanced recycling technology, is expected to start operations in 2026. This facility aims to produce high-value circular polymers, potentially boosting future revenues by meeting the growing demand for sustainable materials.
  
• The second MoReTec unit planned for Houston is expected to double the capacity of the first, signaling a strategic shift towards high-margin circular and low-carbon polymers, which could enhance profit margins and overall earnings.
  
• The anticipated exit from the Refining segment by the first quarter of 2025 could increase net margins as resources shift towards high-value, less volatile, and sustainable business opportunities, streamlining operational focus and capitalizing on low-carbon feedstock trends.
  
• The company's strategic review and potential asset sales or restructuring in Europe are aimed at focusing on high-demand and high-margin markets, which could optimize operations further and improve net earnings and margins in the long run.
  
• LyondellBasell's ongoing focus on capital allocation, working capital management, and cost-advantaged operations, combined with potential tailwinds from global economic conditions, are positioned to improve cash flow and financial resilience, thus enhancing earnings potential.

LyondellBasell Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LyondellBasell Industries's revenue will decrease by -6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $8.84) by about November 2027, up from $2.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.8 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, up from 12.6x today. This future PE is lower than the current PE for the US Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

LyondellBasell Industries Future Earnings Per Share Growth

Risks

• Declining gasoline crack spreads have negatively impacted the profitability of LyondellBasell's refining and oxyfuels business segments, potentially affecting overall earnings.
  
• There is uncertainty around the market demand in Europe, with planned turnarounds and a muted macroeconomic recovery, posing risks to revenue and operating margins in the region.
  
• The exit from the refining business might affect earnings and cash flow initially, despite long-term strategic benefits, as adjustments and costs associated with the transition are realized.
  
• Increased competition and capacity rationalizations in Europe, along with unclear demand recovery in China, pose potential risks to revenue streams and market positioning.
  
• The assumption of stimulus measures and lower interest rates driving PO&D demand recovery might not materialize as expected, impacting revenue growth projections in these segments.

Valuation

• The analysts have a consensus price target of $100.96 for LyondellBasell Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $118.21, and the most bearish reporting a price target of just $85.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $33.0 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $83.44, the analyst's price target of $100.96 is 17.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.