Undervalued LyondellBasell FCF/EV Yield 9%, ROE 55%, ROIC 30% – Large Cap 1000 Stock Screener

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One of the cheapest stocks in our Large Cap 1000 Stock Screener is LyondellBasell Industries NV (NYSE:LYB).

LyondellBasell Industries NV (LyondellBasell) is a petrochemical producer operating in US and Europe. It produces polyethylene and propylene oxide used in various consumer and industrial end products.

A quick look at LyondellBasell’s share price history over the past twelve months shows that the price is up 19%, but here’s why the company remains undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that LyondellBasell has $2.012 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $563 Million in short-term debt and $8.496 Billion in long-term debt. Therefore, LyondellBasell has a net debt position of $7.047 Billion (debt minus cash). For those investors concerned about the company’s net debt position, it’s important to understand LyondellBasell’s free cash flow position below.

If we consider that LyondellBasell currently has a market cap of $35.132 Billion, when we add the net debt totaling $7.047 Billion and minority interests totaling $2 Million that equates to an Enterprise Value of $42.181 Billion.

If we move over to the company’s latest income statements we can see that LyondellBasell has $5.084 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.29, or 8.29 times operating earnings. That places LyondellBasell squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that LyondellBasell generated trailing twelve month operating cash flow of $5.283 Billion and had $1.981 Billion in Capex. That equates to $3.302 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 8%. The company has also spent $1.826 Billion (ttm) buying back shares and $1.401 Billion (ttm) on dividends, providing shareholders with a shareholder yield of 9% (ttm).

In terms of the company’s annualized Return on Invested Capital (ROIC) for the quarter ending June 2017. A quick calculation shows that the company had $13.858 Billion in invested capital for the quarter ending March 2017 and $13.915 Billion for the quarter ending June 2017. If we divide that number by two we get $13.886 Billion. If we then consider that the company had $5.084 Billion (ttm) in operating income multiplied by the tax rate (1 – 28.8%), that equates to NOPAT of $4.131 Billion (ttm). Then when we divide the NOPAT of $4.131 Billion (ttm) by the average invested capital of $13.886 Billion that equates to an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 30% (ttm).

Lastly, its also worth considering LyondellBasell’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $6.462 Billion in equity for the quarter ending March 2017 and $6.866 Billion for the quarter ending June 2017. If we divide that number by two we get $6.664 Billion. If we consider that the company has $3.643 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 55% (ttm). The company also remains financially sound with a Piotroski F-Score of 6, an Altman Z-Score of 4.38, and a Beneish M-Score of -2.73.

In terms of LyondellBasell’s current valuation, the company is trading on a P/E of 9.9 compared to its 5Y average of 11.5**. The company has a FCF/EV Yield of 8% (ttm) and an Acquirer’s Multiple of 8.29, or 8.29 times operating earnings. LyondellBasell has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 55% (ttm), and an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 30% (ttm).  The company also provides a shareholder yield of 9% (ttm). All of which indicates that LyondellBasell is undervalued.

** Morningstar

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