Merrill Lynch Downgrades Three Chemical Companies

Analyst Eric Serotta expects shares of Millennium Chemicals, NOVA, and Lyondell to trade lower as second-quarter earnings improve less than expected

Merrill Lynch downgraded Millennium Chemicals (MCH ), NOVA Chemicals (NCX ), and Lyondell Chemical (LYO ) to sell from neutral.

Analyst Eric Serotta says the shares of each company are up 27% to 32% from March lows amidst expectations of sharp improvement in profitability from a post-war economic rebound and energy price decline. He expects the shares to trade lower in the near term as second-quarter earnings improve less than expected owing to weak volumes, rebounding hydrocarbon costs, and declining polyethylene prices.

While the rise in hydrocarbon costs could prevent a collapse in commodity petrochemical prices, he thinks margins will be squeezed either way. But Serotta says he thinks the companies have the liquidity to weather a downturn.

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