In my search for value, I’ve found it useful to develop a watchlist of stocks that I can check on a regular basis. That means that I often recycle stocks that I’ve previously used to make useful investments in, but don’t currently have a position in. That’s useful, because the familiarity that comes with the company and its approach builds a shorthand that I think can help to make the analysis process more efficient. As changes happen over time, it also helps to provide a historical context that aids perspective about current events and changes.
Westlake Chemical Corporation (WLK) is an example of a stock I’ve followed for a while, have used for some very productive previous investing opportunities, and that I like quite a bit. Technically speaking, the stock has been one of the more interesting stocks to watch in the Chemicals industry. From a pandemic-driven, bear market low in March 2020 that actually marked the bottom of a long-term, extended downward trend at around $28, the stock moved into a very extended long-term upward trend that saw the stock nearly quadruple in price, peaking in June at around $106.50. WLK’s niche in the Chemicals industry is driven primarily by the housing market. One of the most interesting trends to come out of the pandemic has been the sustained rise in demand for housing, leading to outsized increases in real estate prices across the country. That means that stocks tied to housing have had a nice headwind to propel their businesses forward. Continued, accommodative Fed policy in regards to interest rates is only expected to keep fueling this trend, which is at least part of the reason that some analysts are expecting revenues in related industries, to remain healthy into 2022.
Favorable conditions in the housing market have applied both for new homes as well as existing homes, as existing homeowners will probably be more likely to invest in home improvement projects. WLK is one of the biggest producers of PVC products, which are driven primarily by new home starts, but also by improvement projects in existing homes. The company’s most recent earnings reports suggest that WLK weathered the storm better than most, with healthy liquidity and free cash flow to work with along with an increasing operating profile. After hitting that peak in June, the stock slid into a one-month downward slide that bottomed in mid-July and began to consolidate a little above $80 per share. In the last week, the stock has started to pick up bullish momentum, and looks poised to reverse its downward trend. Does that mean that there is both a good technical set up to take advantage of that short-term surge in bullish momentum, as well as a useful value-based opportunity? Let’s find out.
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 $11.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by nearly 3,573% (not a typo), while revenues increased by more than 67%. In the last quarter, earnings improved by more than 116%, while sales were about 21% higher. Lest you think those numbers just can’t be correct, note also that the company’s margin profile narrowed in 2020, but is showing significant signs of recovery; in the last quarter, Net Income was 10.29% of Revenues for the last twelve months, and increased to 18.26% in the last quarter.
Free Cash Flow: WLK’s free cash flow is healthy and strengthening, at $1.16 billion. This measurement has improved significantly over the past year, when Free Cash Flow was $613 million. Its current level translates to a Free Cash Flow Yield of 10.58%. The strength in this metric is a solid confirmation of the earnings and Net Income picture I just described.
Debt to Equity: WLK’s debt/equity ratio is .48, 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 $1.84 billion while long-term debt was about $3.55 billion. The company’s liquidity is also getting stronger, from $1.3 billion in cash two quarters ago. Their operating profile indicates they should have no problem servicing their debt, with healthy liquidity providing additional flexibility.
Dividend: WLK pays an annual dividend of $1.19 per share, which translates to a dividend yield of about 1.38% at the stock’s current price. While the dividend yield isn’t remarkable, it should be noted that after the company most recent earnings report, management announced a 10% increase in its dividend payout, from $1.08 per share. I consider a consistent dividend to be a sign of fundamental strength; an increasing dividend is an even stronger assertion of management’s confidence in their operating and competitive strategies.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $110 per share. That suggests that WLK is undervalued by about 25% from its current price. I would also like to note that in the last quarter, this same metric yielded a long-term target price at around $101 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 upward trend over the past year, from a low at around $58.50 in September of last year to its June high at around $106.50; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After consolidating in a narrow range between $80 and $84, the stock broke above that top-end resistance level yesterday, which means that current support now should be at $84. Immediate resistance is at around $88, which is about where the stock closed yesterday, and which also lines up with the 38.2% retracement line. A push above $88 should see short-term upside to about $92, with additional room to $95 if bullish momentum remains strong. A drop below $84 should find next support between $80 and $81.
Near-term Keys: WLK’s fundamentals, which continue to show signs of increasing strength, lend credence to the stock’s value proposition, which is interesting enough to warrant a diligent eye. If you’re willing to accept some volatility associated with the stock’s general price action, the stock could offer an interesting value opportunity right now. If you prefer to work with short-term trading strategies, you could watch for a push above $88 as a signal to consider buying the stock or working with call options, using $92 to $95 as practical profit targets. A reversal of the stock current momentum, with a drop below $84 could be a signal to think about shorting the stock or buying put options; in that case, use $81 to $80 as a useful area to take profits on a bearish trade.