Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 07 September 2015 at 11:30 GMT

Alpha picks: LyondellBasell riding pricing power, shale gas wave

Head of Equity Strategy / Saxo Bank
  • Undervalued LyondellBasell set for rise on low natural gas prices, pricing power
  • US chemicals giant enjoyed revenues of $39.7 bn in past 12 months
  • Gilead Sciences fair price share value set at $115-120
  • JetBlue continues to outperform airline peers
Today we release our top equity alpha picks across the mega, large and mid-cap segments on the US and European equity markets. We present our top 20 picks across each segment. The picks are based on our quantitative equity model utilising several well-known risk factors.

 Are the wheels about to turn in the right direction for
US 'chemicals giant LyondellBasell? Photo: iStock

By Peter Garnry

Gilead still very attractive

Gilead Sciences is still our model's favourite mega-cap stock pick driven by very attractive valuation on outlook and best-in-industry return on invested capital. We added the stock to our strategic equity portfolio last week hedging some of the risk by shorting Alexion Pharmaceuticals. 

The company has a ROIC of 68.2% which is the best in the industry on top of a stock valuation trading at a 30% discount to the S&P 500. Forward growth expectations have recently collapsed to only 1%/year which we believe is extremely bearish given the company's pipeline and historical track record.

Our short-term view is that the stock should trade around $115-120 to be fairly valued.

Gilead Sciences share price the past year
Gilead Sciences share price
Source: Saxo Bank 

Swoop on LyondellBasell's 6% decline

LyondellBasell is our focus in today's update in the large cap segment. 

The US chemical company has a large and diversified revenue at $39.7 billion in the last 12 months with an attractive EBITDA margin of 18.3% which is also expanding due to favourable underlying factors in the industry. 

The company is currently benefiting from low US Henry Hub natural gas prices, driven by the US shale gas revolution, compared to global oil prices boosting margins. 

What is a very attractive about the company is the fact that it has been able to expand operating margins in an environment with downward pressure on chemical prices due to increasing pricing power. In addition the company has a very low net debt to EBITDA levels.

The ROIC is 35.5% which is one of the highest ratios in the industry among the major players. As a result, the current low valuation is not reflecting the strong business fundamentals.

Last week's 6% decline in its shares is a good opportunity for long-term investors to add exposure. Our short-term price forecast is for the share price to back to the $100 level reflecting the long-term outlook of the industry. This view is based on a slowing Chinese economy and not a global economy slipping into recession.

LyondellBasell share price the past year
LyondellBasell share price
Source: Saxo Bank 

JetBlue up 6.3% last week

JetBlue continues to outperform its industry and the general market in the mid-caps sector with shares up 49.6% this year as lower fuel costs and higher factor loads are boosting operating margins. As a result the ROIC has expanded to 18.2% which is very high in the airliner industry. Investors are noticing the same thing, sending the stock up 6.3% last week.

The company's revenue is forecast to grow 9% year-on-year over the coming years with EBITDA margins expanding from the current level of 20% to 24.5% in 2017, as fuel cost impact is expected to remain low and supply of seats constrained adding pricing power to US airliners.

JetBlue share price the past year
JetBlue share price
Source: Saxo Bank 

JetBlue is also part of our Saxo Alpha Equity Picks portfolio which is long-term long only equity portfolio consisting of our top 20 alpha picks in the US. The portfolio is only available to Saxo Bank clients on request through the client's sales trader.

See all the alpha picks in the attached PDF.

 Jetblue's got its tail up. Photo: iStock

— Edited by Martin O'Rourke

Peter Garnry is head of equities strategy at Saxo Bank

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Alpha Picks - 2015-09-07


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