Why LyondellBasell Is Trading at a Discount to Peers

After looking at analysts’ recommendations in the previous part, we’ll look into LyondellBasell’s latest valuation and compare it with peer Eastman Chemical (EMN). As of June 26, 2017, LyondellBasell’s one-year forward PE (price-to-earnings) multiple stood at 8.50x, while EMN’s one-year forward price-to-earnings multiple was at 10.90x.

Forward PE is one of the many tools that investors can use to compare two or more companies that are operating in the same industry and check who is overvalued and undervalued. The one-year forward PE multiple considers future earnings and tells us how much an investor is paying for the stock per dollar of expected earnings over the next 12 months.

At present, LyondellBasell is trading at a discount to its peer EMN. LYB’s 1Q17 earnings missed the analysts’ expectations, which resulted in the fall in LYB’s stock price. The fall in crude oil prices is expected to hurt its refinery segment. However, analysts expect LYB to post earnings per share of $9.83 for fiscal 2017, an increase of 7.8% over fiscal 2016. For fiscal 2018, analysts are expecting LYB’s EPS to be at $9.08, a decline of ~7.6% over expected EPS of 2017.

On the other hand, EMN’s 1Q17 earnings beat the analysts’ expectation. Analysts expect 2017 earnings to be at $7.47, an increase of approximately 29% over 2016. For fiscal 2018, EMN’s EPS is expected to rise 6.4% over 2017 expected earnings. With EMN’s stronger earnings growth rate compared to LyondellBasell’s growth rate, investors would be happy to pay a premium for growth companies.

Investors can get exposure to LyondellBasell by investing in the PowerShares DWA Basic Materials Momentum Portfolio (PYZ). PYZ invests 3.0% of its portfolio in LyondellBasell. The top holdings of the fund include FMC (FMC) and Chemours (CC), which have weights of 5.3% and 5.0%, respectively, as of June 26, 2017.