Dow Inc. and LyondellBasell Stock Won’t Outperform Soon, Says J.P. Morgan

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Dow Inc.

and

LyondellBasell Industries

“are probably not the best places to put new money to work,” J.P. Morgan analyst Jeffrey Zekauskas wrote on Friday.

Dow (ticker: DOW) recently announced it plans to cut global polyethylene-production rates by 15%. Polyethylene is a widely used plastic.

Then earlier this week, an analyst from KeyBanc downgraded commodity-chemical producers including Dow (ticker: DOW) and LyondellBasell (LYB) to Underweight from Sector Weight, and wrote that a “petrochemical recession Is likely upon us.”

Today, J.P. Morgan’s Zekauskas downgraded both Dow and LyondellBasell to Neutral from Overweight, citing a decline in commodity-chemical prices and demand slowing as reasons for his downgrades. He also cut the price targets on Dow and LyondellBasell to $47 and $80, respectively, from $60 and $115, respectively.

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“We think it is unlikely that Dow and LyondellBasell will outperform the market in the coming weeks,” Zekauskas wrote in a research note.

Zekauskas wrote that spot prices of polyethylene have been slipping both in the domestic and offshore markets. He also added that demand from China for plastics “remains very sluggish” and European demand “is weak as the consumer is saddled with high energy and electricity costs.”

Despite the downgrades, “both companies offer dividend yields above 5.5%, which we believe secure,” Zekauskas wrote. He added, “Both companies are likely to deliver free cash flow yields above 10% in 2023. Both companies have good balance sheets. We are unwilling to Underweight the two companies for these reasons. Both LyondellBasell and Dow, in our opinion, reflect good value that is unlikely to be recognized shorter-term against a background of negative shorter-term earnings momentum.”

Dow stock is down 0.1% Friday to $49.91, and Lyondell stock is 0.2% lower. The

S&P 500
gained 0.6% Friday.

Write to Angela Palumbo at [email protected]