Lyondell Chemical (LYO ) "isn't the kind of stock we normally have in our portfolio," says value investor Scott Black, president of Boston's Delphi Capital Management. It is highly leveraged, with a debt burden of $3.9 billion, he notes, because of an acquisition in 1998. "But we've bought shares because it's an attractive play on the recovery," he says, "and an overdue snapback in chemicals."
The time to buy chemical stocks is when nobody wants them--and before prices shoot up, he argues. A leading low-cost producer of propylene oxide, ethylene, and polyethylene, Lyondell has been improving its balance sheet and making sure that the dividend payout of 6% is protected, says Black. He figures Lyondell will post a loss this year but earn $1 a share in 2003. The big payoff, however, will be in 2004, when Black expects earnings of $4 a share.
Nancy Traub of Credit Suisse First Boston thinks the chemical supply-and-demand cycle bottomed out in 2001. A combination of restocking, demand growth, and limited plant-capacity expansions, she says, will lead to higher prices, margins, and earnings through 2004 and 2005. She doesn't own shares. Credit Suisse First Boston is advising Lyondell on buying some assets from Occidental Petroleum.
By Gene G. Marcial