Chemicals 
A Less Taxing Situation? Our Latest Thoughts on US Corporate Tax Reform
• We refresh our analysis of implications of a probable reduction in the US corporate tax rate. As a follow-on to our preliminary thoughts on the subject following the US presidential election and in our 2017 Outlook piece (click here), we update herein our research regarding implications of a likely change in the US corporate tax regime with the Senate tax bill having passed 51-49 over the weekend. Figure 1 quantifies potential upgrades to 2018 EPS and FCF yields in the event of a US corporate tax rate cut to 20%. Not surprisingly, our analysis suggests that the largest beneficiaries of US corporate tax reform will be companies with above-average exposure to the US market, while smaller beneficiaries tend to be more international in nature.
• Larger winners vs. smaller winners: Our analysis suggests that shares of Buy-rated, Westlake Chemical and Hold-rated OLN would benefit most in terms of percentage uplift to 2018E EPS, followed by Hold-rated RPM and Hold-rated Sherwin-Williams. In terms of accretion to prospective FCF yield, these same names score well along with Buy-rated LyondellBasell and Buy-rated Eastman Chemical. In contrast...
• We could see additional changes through the reconciliation process. While much of the national media focus has been on the Senate recently, the Senate bill must now be reconciled with the House tax bill in coming weeks. In Figure 3, we compare and contrast these two bills with regard to corporate taxation. As a next step, the two chambers must now go to conference and iron out the differences. Key discrepancies still to be negotiated include the timing of implementation, as well as the tax treatment of numerous issues: interest expense, capital investment, NOLs, various business credits and deductions, international income, and repatriation of foreign earnings. For example...
• So, what does all of this imply for stock upside from here? Arguably, much of the upside from prospective corporate tax reform has already been priced into equities, beginning with the election of President Trump and extended through last week when prospects of a positive outcome in the Senate improved. Taking into account recent stock action, we suspect that future tax-related benefits are perhaps under-appreciated in the case of Hold-rated OLN, and Buy-rated LYB. 
• Our methodology keeps it simple. Tax accounting is notoriously complex, especially in the US. As a result, we have opted to simplify our analysis as much as possible. We considered the potential for a US corporate tax rate reduction from 35% presently to 20%, and we recalculated 2018 pro forma EPS in that scenario. In so doing, we held all else constant, i.e. we have not attempted to factor in effects related to repatriation of cash overseas and international earnings, nor have we attempted to adjust for other possible changes related to capital investment, NOLs and various other issues. We expect that certain tax shields will be eliminated or adjusted in order to fund the substantial proposed reduction in the benchmark US corporate tax rate. Another possibility is that the US corporate tax rate itself will be adjusted, perhaps to 22% as had been proposed by Senators Mike Lee (Utah-R) and Marco Rubio (Florida-R) at one point during the Senate negotiations. Likewise, we have not attempted to account for any  changes in personal income tax rates, or changes in economic growth rates related thereto.
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