BASF: Contrary Play in ‘All the Wrong Places’

12/18/2014 10:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

With the tailwinds of a weaker euro and a solid global economy at their backs, European corporations could deliver meaningful earnings growth in 2015, explains Yiannis Mostrous, global expert and editor at Capitalist Times.

Of course, if the EU fails to address its economic challenges, global growth falters or geopolitical turmoil ensues, the eurozone could slip into its third recession in five years.

As such, we continue to favor large-cap names that hail from cyclical industries and pay a reliable dividend.

Not only does valuations for stocks that meet these criteria remain reasonable, but these names also stand to benefit the most if our forecast pans out.

And in the event that the situation in Europe worsens, these stocks should hold up better than smaller-caps and pure growth plays.

BASF (SEA:BASF) (OTC: BASFY) is one of the world’s largest producers of commodity chemicals and inorganic intermediates; it also specializes in crop protection, and oil and gas production, and distribution.

Investors will shun the stock in the near-term because the company is involved in all the wrong businesses in all the wrong places at the wrong time.

Not only does it produce oil in Libya and natural gas in Russia—two hot spots for security-related disruptions and political risk—but also all its business lines have significant exposure to Europe’s languishing economy.

Two out-of-favor industries—petrochemicals and oil and gas production—also accounts for the bulk of the firm’s revenue.

On the plus side, BASF plans to scale back its capital expenditures, having completed most of its planned growth projects. And the conglomerate will also complete a EUR1 billion cost-cutting program this year and plans to slash at least another EUR300 in expenses in 2015.

The company also continues to high-grade its portfolio, recently announcing the divestment of its textile chemicals operations, the dissolution of its paper products division and plans to pursue strategic alternatives for parts of its underperforming kaolin business.

BASF’s stock could snap back sharply if the EU economy shifts into growth mode. At present, the shares trade at a valuation that implies zero earnings growth next year, creating a good entry point for intrepid investors. BASF remains a buy up to EUR85 per share in Frankfurt.

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