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Why LyondellBasell Could See Higher Adjusted Earnings in 1Q18

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LyondellBasell’s 1Q18 earnings

LyondellBasell (LYB) is expected to report adjusted earnings per share of $2.74 in 1Q18, a whopping 37% increase on a year-over-year basis. In 1Q17, LYB reported adjusted earnings per share of $2.00. In 2017, LYB managed to beat analyst estimates twice, but also missed estimates twice. It remains to be seen whether LYB can change the trend in fiscal 2018.

The projected adjusted earnings per share are expected to be driven by a reduction in the cost of goods sold (or COGS) and a reduction in selling, general, and administrative (or SG&A) expenses as a percentage of sales. Further, LYB’s share repurchases and lower tax rates are expected to improve LYB’s adjusted earnings per share in 1Q18.

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LYB’s COGS in 1Q18 is expected to be approximately $7.5 billion, which is 79.6% of the expected sales. In 1Q17, LYB reported COGS of $7.0 billion, which was 82.9% of sales. This estimate implies an improvement of 330 basis points on a year-over-year basis. Similarly, LYB’s SG&A expenses in 1Q18 are expected to be at 2.5% of the expected sales. However, in 1Q18, expenses were 2.7% of the sales, a decrease of 20 basis points on a year-over-year basis.

Share repurchases

LyondellBasell has been actively engaged in share repurchases. In 4Q17, LYB bought ~880,000 shares. In May 2017, LYB’s board authorized buybacks of 40 million outstanding shares until November 2018. At the end of 4Q17, LYB had approximately 395 million common shares outstanding. LYB will likely continue its share repurchases in this quarter as well. The outstanding shares at the end of 1Q18 are projected to be at 394.2 million.

Investors can indirectly hold LyondellBasell by investing in the Vanguard Materials ETF (VAW), which invests 3.8% of its portfolio in LyondellBasell. The fund also provides exposure to Sherwin-Williams (SHW), PPG Industries (PPG), and Celanese (CE), which have weights of 3.5%, 2.9%, and 1.6%, respectively, as of April 20, 2018.

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