RBC Upgrades Dow Chemical, Removes LyondellBasell As Top Pick And Downgrades To Outperform

• Shares of both LyondellBasell Industries NV LYB and Dow Chemical Co DOW are down 13 percent since January 4.
• RBC Capital Markets’ Arun Viswanathan downgraded the rating for LyondellBasell from Top Pick to Outperform, while raising Dow Chemical from Outperform to Top Pick.
• Sustainability of Dow Chemical’s above-market volume growth and margins make it more attractive than LyondellBasell, Viswanathan stated.

LyondellBasell

The price target for the company has been reduced from $105 to $95.

LyondellBasell’s strong exposure to the North American shale gas boom, robust organic growth through low-cost and high return buybacks and value return via buybacks and dividends make it an attractive investment option, analyst Arun Viswanathan said.

He added, however, that compression in the oil-to-gas ratio and oncoming NA ethylene capacity could potentially overshadow LyondellBasell’s positive features.

LyondellBasell’s 4Q EPS of $2.20 was marginally ahead of the RBC estimate of $2.10 as Americas and Europe O&P offset weaker-than-expected I&D segment results.

The EPS estimates for 2016 and 2017 have been reduced from $9 to $8.75 and from $10 to $9.50, respectively, to reflect lower I&D income and lower refining income.

Dow Chemical

The price target for Dow Chemical has been raised from $51 to $60.

The company’s robust 4Q15 results were boosted by one-time factors, Viswanathan mentioned. Dow Chemical recorded a 4 percent y/y volume growth excluding divestitures in 4Q15, versus a 2 percent increase in 3Q15.

Although the company faces some headwinds in 1H16, it has several positive features, including sustainable strong above-market volume and margin growth, a robust growth pipeline of EBITDA and benefits expected from its cost cutting efforts and merger synergies, the analyst stated.

The RBC Capital Markets report noted, “Dow provides strong above-market volume and margin growth that appears sustainable, a compelling 2-3 year EBITDA growth pipeline, and most different from LYB, a robust 12-18 month self-help backstop from cost cutting and merger synergies.”