Summary
- BASF (OTCQX:BASFY) has a P/E of 9.4, strong fundamentals and a wide moat, being the largest chemical company in the world.
- BASF pays a big dividend, which it has increased regularly, and has a stellar dividend track record.
- The current geopolitical turmoil in Europe persists, but gas prices have dropped significantly, making BASF more competitive again.
- My DCF analysis shows a slight undervaluation for BASF. This, combined with the strong fundamentals, the attractive valuation and gas prices dropping, make it a solid ‘Buy’.
Thesis
Recently I wrote about why Bayer (BAYRY) was undervalued and could be a turnaround stock. With Bayer the first signs of a turnaround are already in the making and the stock has clearly outperformed the S&P 500 since I published the article. I think the case for BASF (BASFY) is very similar to Bayer, just with a different catalyst (geopolitical overreaction) and for a different type of investor. Just like Bayer, BASF is a large, multinational chemical company based in Germany. The company produces a wide range of products, including chemicals, plastics, performance products, and crop protection products, and operates in over 80 countries worldwide. Founded in 1865, it is one of the largest chemical companies in the world and has a strong focus on research and development. It currently trades at a P/E ratio of around 9.4 and yields a dividend of 6.5%. Moreover, its P/B ratio is just above 1. Its return over the last year has been -25.3%, as concerns about the war in Ukraine loom over the German industrial giant. Gas prices have cooled down however and BASF still boasts strong fundamentals. My analysis shows that the company could be undervalued and a strong stock pick for 2023, especially if you seek a reliable dividend. I therefore assign it a 'Buy' rating.
Favorable fundamentals at an attractive price
As shown above, BASF trades at favorable P/E (9.4) and P/B (~1) ratios, exacerbated by its poor stock performance over the last few years. The stock has been down over 40% over the last 5 years and has thus been a dismal investment, especially with the SP500 returning +40% over the same period. I do however think that the stock has been discounted to such an extent that it makes for an attractive buy right now. BASF has been around since the 19th century and is a dominant player in the chemical industry, in plastic production, performance products and crop protection. Next to that it also has a strong presence in agriculture and nutrition. It is an industry leader in Europe and also has a strong record of paying a sustained dividend over the last few years. In recent years, the dividend has never been lowered and has increased from €2.60 in 2012 to €3.40 in 2021. On average the dividend has grown for around 3% a year and it has been well covered. BASF also expects to keep increasing dividend in the coming year. One point of concern is the long-term debt, though. The long-term debt of BASF has grown to over €15 billion. Currently, this is under control, but it does pose a risk for the future.
Macro headwind dissipating: Decreasing gas prices
The war in Ukraine has had a significant impact on the German economy, mostly due to the country's great dependency on Russian gas. This has been a critical weakness and this dependency is still looming over the German industrial sector. Shortly after the Russian invasion of Ukraine gas prices exploded, as seen in the figure below. However, in recent months they have been decreasing rapidly. Europe has invested heavily into a LNG-based economy and has increased its reserves over the last few months; currently 83.5% of EU gas storage is filled. This makes firms such as BASF much more competitive again and will increase its profitability in the near future. BASF CFO Hans-Ulrich Engel has confirmed in October that the extra costs from gas usage in Q3 of 2022 amounted to €600 million, which will thus be significantly lower the next quarter. But even with higher gas prices, BASF has shown to be flexible in dealing with the situation, as the CFO has stated :
We have, in fact, in Q3 reduced gas consumption significantly. We have reduced as a result of not running certain plants or running them at lower capacities substituting by way of purchases from the market. To the extent we could, we have also substituted natural gas in the -- on the utility side by using alternative sources, i.e., heating oil.
Management has thus been on top of the situation and that same situation has significantly improved since the Q3 results were presented.
Reliable and cheap compared to peers
BASF is the largest chemical company in the world by total revenue in 2021, with Dow Chemical (NYSE: DOW ) a close second. Its scale, R&D spending, diversified portfolio and strong customer relations provide it with a wide moat in the industry. When compared to its peers, it compares favorably on its current valuation, such as its P/E ratio (only DOW's is lower) and P/B ratio (lowest of the pack), but less favorably on profitability and growth. The comparison is difficult however, as the companies only partially compete due to the different product portfolios that they have. I, myself, would prefer to own Bayer at this time, as I think it has more of a moat and better growth opportunities. However, BASF is very attractive as well as it pays a big dividend compared to its main competitors and is one of the cheapest stocks to own.
DCF analysis shows slight undervaluation
Just as I did with Bayer, I performed a DCF analysis for BASF as well. Over the last five completed fiscal years (2018 - 2021), BASF has had free cash flow per share vary between 2.49 (2020) and 5.21 (2018). For my calculations, I will be using the average of the last five years, at just above €4 per share. Furthermore, I will use a terminal growth rate of 3%, a discount rate of 10%, a conservative growth rate of 3% (equal to the dividend growth rates) and a time horizon of 10 years, this yields us an intrinsic value of almost €59. For completion's sake, I also added a figure with growth rates varying from 0% to 5%. BASF thus might be undervalued, but not as much as Bayer. I do think, however, that BASF is a more stable company for the moment, as its free cash flow per share has been rock solid over the last few years and its dividend is thus well covered. If you are looking for a (slightly) undervalued company, with a solid track record and a strong dividend, BASF is definitely one to put on your watchlist.
Conclusion
BASF is the largest chemical company in the world by revenue and has a wide moat due to its scale, R&D spending, diversified portfolio and strong customer relations. It is also attractively valued, with a P/E of 9.4 and a P/B ratio of just above 1. BASF also has a strong track record of paying a sustained dividend and a reliable free cash flow. My DCF model underlines that BASF might be slightly undervalued and thus the stock might have some upward potential, next to its strong dividend. Although its closest German peer, Bayer, has more upward potential in my opinion, I do like BASF as a solid investment with a strong dividend. The geopolitical situation in Europe is a reason for concern, but the market did overreact, as gas prices have come down significantly. All in all, I rate BASF a solid 'Buy', especially when you are looking for a cheap but strong company which pays a reliable dividend.
For further details see:
BASF: Slightly Undervalued With A Reliable Dividend