While a lot of investors are wringing their hands and fretting about what the near-term future of the market is going to be, the truth is that market corrections tend to be healthy in the long-term. It is true that the market could move beyond the corrective stage into a long-anticipated and much-feared bear market. Even so, the fact that most economic indicators right now remain generally healthy, with few apparent catalysts to actually force the economy into a legitimate recession, for now the strength of the market’s long-term trend suggests that the currently bearish momentum is more likely to offer up new opportunities to buy good companies at nice stock prices.
A lot of sectors and industries have corrected sharply over the last few weeks. That includes the Materials sector, which includes industries like Paper and Paper Products, Fertilizer and Chemicals. In the Chemicals industry, there are a number of stocks that have found a useful place in my watchlist. One of those is Westlake Chemical Corp (WLK). The stock has dropped clearly into corrective territory over the last three weeks, being down a little over -15% over that time period and nearing multi-year low prices. Does that make the stock a good value right now? Perhaps; let’s dive in and take a look.
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 $7.8 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. Its current level translates to a Free Cash Flow Yield of 5.38%.
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 1.72% 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 1.22. WLK’s historical average Price/Book ratio is 2.15, which means that the stock is significantly undervalued, by a little over 75%. WLK’s Price/Cash Flow ratio also shows a similar, undervalued perspective, which means that between both measurements, there is a case to be made for a long-term target price between $99 and $106 per share.
Technical Profile
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 $56 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, along with the stock’s rally to about $75 per share in early November. The stock drifted, moving gradually lower until mid-January from that point, but has seen its bearish momentum picking up from that point to its current price a little below $61 per share. The stock’s nearest support is at September’s trend low point at $56, with immediate resistance at around $66 per share. The stock would need to push above secondary resistance at $72 to mark a legitimate new upward trend.
Near-term Keys: WLK’s current bearish momentum means that if you’re looking for a short-term trade, the best probabilities lie on the bearish side. If the stock continues to move lower, there is a good opportunity to work with put options or to consider shorting the stock with an eye on $56 as a useful exit target. A bullish trade is very speculative in the short-term, but if the stock picks up enough momentum to push above $72, the resulting short-term upward trend could offer an interesting opportunity to buy the stock or work with call options, with an eye on a bullish target between $77 and $82 per share. The stock’s fundamental strength, along with its value proposition offers an very interesting long-term opportunity, provided you’re not afraid of short-term volatility that right now could push the stock even further below its current price.