When making an initially mistimed 2008 investment in LyondellBasell's debt and a subsequent push for equity control in its 2009 bankruptcy, Apollo faced an investment in a company with negative earnings and cash flow that made it expensive on classic valuation multiples.

But when projecting LyondellBasell's future earnings or by studying its trailing results, Apollo likely saw a bargain-priced company in 2008 and 2009. Now, if ordinary investors see the company's current low earnings multiples as a similar bargain they are misguided.

Credit Suisse's McNulty makes the argument that while the company's valuation of less than five times EBITDA looks like a cyclical low, that's only because earnings are churning at a cyclical high. In his continued optimism on LyondellBasell shares, which have gained nearly 50% in 2012, the analyst makes the point that if earnings have topped out, he expects valuations haven't.

For instance, while McNulty recently cut his estimate of 2013 and 2014 earnings, implicit in his 'Buy' recommendation of LyondellBasell shares is a rise in the company's earnings multiple.

In this counterintuitive investing dynamic no one has more at stake than Apollo.

Apollo's near 30% stake in LyondellBasell is worth roughly $9 billion and it comprises almost half of the private equity firm's largest fund. Meanwhile, the fund's 33% investment gain, driven by its LyondellBasell investment, accounts for nearly 20% of the firm's total investing profits over its 20-year plus history, according to its latest earnings.

Other large LyondellBasell shareholders include private equity fund Access Industries, which maintained a 14% stake in the company after ceding control of it to Apollo in bankruptcy. Hedge fund investors Viking Global Management and Ares Management own roughly $500 million of the company's stock.

Apollo's investment in LyondellBasell spans a complicated Wall Street saga that includes a leveraged buyout and an industry-rattling bankruptcy -- but the firm's investment success boils down to properly understanding the interplay between cyclical earnings and valuations. That has a strong relevance to the ordinary investor.

-- Written by Antoine Gara in New York

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