There are a lot of different ways to scour the market for good investing opportunities – as many different ways, in fact as there are investors. One of the simple methods that I like to use to start filtering the more than 7,000 different stocks listed on the major U.S. exchanges to a more manageable list uses dividends. Dividend stocks have remained a central piece of my evaluation method for years – in fact, they are a basic requirement for my value-oriented investing system. They provide a straightforward way to look for stocks that generally stand apart from the crowd from a fundamental standpoint.
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Dividend stocks can, of course be as volatile as any other kind of stock; however the fact that the company pays a regular, consistent dividend can offer a good reason to look for and hang onto fundamentally strong companies even during a bear market. If you can also find a stock that happens to be trading at or near historical lows, you’ll often be able to find yourself on the lower end of the risk scale even if the market does actually, and inevitably turn bearish.
Westlake Chemical Corp (WLK) is a company in a sector, Materials, that I think is very interesting, even in current market conditions. The sector is generally sensitive to economic cycles, as are most sectors of the market, but it is also true that many of the stocks in this category – particularly in the Chemicals industry – manufacture and market the basic materials that are used in practically every conceivable kind of product.
WLK has underperformed the sector, and many of its competitors over the past year or so; after reaching a high in May of 2018 at around $124, the stock dropped back to a downward trend low point around $57 in August. From that point, the stock has built a nice upward trend that appears poised to move into an intermediate time frame, including a short-term pullback from a pivot high around $75 to its current level a little below $69 per share. The stock’s current bullish momentum, along with its fundamental strength could be a good reason to think about using the stock for a bullish investment; but is the value proposition also good enough to make it a smart long-term bet?
Fundamental and Value Profile
Westlake Chemical Corporation is a global manufacturer and marketer of basic chemicals, vinyls, polymers and building products. The Company’s products include a range of chemicals, which are fundamental to various consumer and industrial markets, including flexible and rigid packaging, automotive products, coatings, water treatment, refrigerants, residential and commercial construction, as well as other durable and non-durable goods. Its segments include Olefins and Vinyls. It manufactures ethylene (through Westlake Chemical OpCo LP (OpCo)), polyethylene, styrene and associated co-products at its manufacturing facility in Lake Charles and polyethylene at its Longview facility. The Company’s products in its Vinyls segment include polyvinyl chloride (PVC), vinyl chloride monomer (VCM), ethylene dichloride (EDC), chlor-alkali (chlorine and caustic soda) and chlorinated derivative products and, through OpCo, ethylene. It also manufactures and sells building products fabricated from PVC. WLK’s current market cap is $8.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined sharply, by -48, while revenues dropped by -8.38%. In the last quarter, earnings improved by 32.6%, while sales remained negative, at -3.64%. The company’s margin profile is healthy, and is also strengthening, with Net Income running at 5.73% of Revenues for the last twelve months, and improving to 7.64% in the last quarter.
Free Cash Flow: WLK’s free cash flow is generally healthy, at $423 million. This measurement is also showing signs of erosion, since it was a little over $1 billion in the third quarter of 2018. It’s current level translates to a Free Cash Flow Yield of 4.79%.
Debt to Equity: WLK’s debt/equity ratio is .59, which is conservative and implies the company takes a careful approach to debt management. WLK’s cash and liquid assets in the last quarter were about $1.437 billion while long-term debt was about $3.75 billion. The company’s operating profile indicates they should have no problem servicing their debt, with generally good liquidity as well.
Dividend: WLK pays an annual dividend of $1.05 per share, which translates to a dividend yield of about 1.53% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. WLK’s Book Value is $49.57, which means that the stock’s Price/Book ratio right now is 1.38. WLK’s historical average Price/Book ratio is 2.41, which means that the stock is significantly undervalued, by almost 74%. WLK’s Price/Cash Flow ratio also shows a similar, undervalued perspective, which means that between both measurement there is a case to be made for a long-term target price between $103 and $119 per share.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend from May of 2018 to its recent low around $55 in late August; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s downward trend can’t be missed, but the stock’s upward trend from that point is also easy to see. At the beginning of November, the stock dropped from a pivot high around $75 per share, and is now very near its last pivot low support point at around $67 per share. Immediate resistance is around $70; if the stock can break above that price, it should have good short-term momentum to test the last pivot high at $75. A drop below $67, on the other hand could see the stock drop to around $61 per share before finding new support.
Near-term Keys: WLK’s current bullish momentum could provide interesting opportunities to implement short-term, momentum-based trading methods. A break above $70 could offer a good opportunity to buy the stock or work with call options, with an eye on $75 as a useful profit target. If the stock breaks below support at $67, you could consider shorting the stock or working with put options. In that case, $61 stands as a useful exit point for a bearish trade. If you like the stock’s fundamental profile, and can work with a long-term forecast for the stock, WLK’s value proposition offers a compelling opportunity to buy a good company at a nice price.