Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor -Â October 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how LyondellBasell Industries (LYB)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â LyondellBasell Industries N.V. is an independent chemical company. The Companyâ€™s chemicals businesses consist of processing plants that convert volumes of liquid and gaseous hydrocarbon feedstock into plastic resins and other chemicals. Its Houston refinery processes crude oil into fuels, such as gasoline, diesel and jet fuel. Its segments include Olefins and Polyolefins-Americas (O&P-Americas), Olefins and Polyolefins-Europe, Asia, International (O&P-EAI), Intermediates and Derivatives (I&D), Refining & Oxyfuels and Technology. Itâ€™s O&P-Americas and O&P-EAI products include olefins, polyolefins and polypropylene (PP) compounds. I&D products include acetyls and ethylene derivatives. Refining & Oxyfuels include gasoline and alkylate. Technology include PP process technologies land polyolefin catalysts. On January 4, 2012, refinery operations were suspended at its Berre refinery in France.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$90.60|
|Value Based on 0% Growth||$53.11|
|Market Implied Growth Rate||3.08%|
|Net Current Asset Value (NCAV)||-$5.58|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
LyondellBasell IndustriesÂ is suitableÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned by the company’s short history post-bankruptcy, and the highÂ PB ratio, while the Enterprising InvestorÂ has no initial concerns. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. Â As for a valuation,Â the company appears to be undervaluedÂ after growingÂ its EPSmg (normalized earnings) from $0.93 in 2010 to an estimated $6.25 for 2014. Â This level of demonstrated growth outpacesÂ the market’s implied estimate of 3.08%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on LyondellBasell Industries (LYB)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in LyondellBasell Industries (LYB)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.