The market appears to be picking up some new, bullish momentum, with the S&P 500 pushing to a new, 52-week high point that could be a catalyst for more upside to come.
An extension of the overall bullish trend in the S&P 500 that dates back to October of last year is a generally positive sign, even as economic uncertainties persist. Whether it will be enough to reverse the bear market conditions that set in last year remains to be seen, which is why I think a smart investor continues to put an emphasis on finding useful value. I’ve found it helpful 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 nice, 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 company 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. In the last year, the stock has experienced both a long downward trend, falling from a May 2022 peak at around $141 to a low in September at around $81. From that point, the stock rallied to a high in February of this year at around $125, only to fall back with the rest of the market to a low at around $103 in March. From there, the stock has been somewhat volatile as it looks for a new direction, with an early May high at around $122.50 countered by a late May low at around $104 per share, and the stock now a little above $110.
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 was the sustained rise in demand for housing, leading to outsized increases in real estate prices across the country. That meant that stocks tied to housing had a nice headwind to propel their businesses forward through 2021. In 2022, rising inflation prompted sharp increases in interest rates that have been restricting economic growth, with more rate increases in the first half of 2023 and questions about how long that pattern will continue. Not surprisingly, the housing market has seen drops in mortgage applications, and new home sales, with many of the hottest housing markets during the pandemic starting to see their own declines in activity and even some declines in home prices from their earlier highs.
Rising interest rates make new and existing home purchases more difficult, on top of the acceleration in housing prices in 2020 and 2021 that saw the average home price rise above affordability levels for the average American family. They also complicate another important aspect of the housing market for a company like WLK, which applies to existing homeowners investing 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 those improvement projects in existing homes. The company’s most recent earnings reports suggest that WLK has weathered the pandemic storm, and current difficulties like rising input costs better than most. The company also boasts healthy liquidity and free cash flow to work with along with a generally healthy, stable operating profile. Does the stock’s latest price action suggest that there could be a new, 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 $14.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by almost -48%, while revenues were about -17.25% lower. In the last quarter, earnings rose a little more than 70%, while sales were 1.73% higher. The company’s operating profile is healthy, but also reflects some of the impact of the current inflationary environment; Net Income was 12.49% of Revenues for the last twelve months, and narrowed slightly to 11.74% in the last quarter.
Free Cash Flow: WLK’s free cash flow is healthy, at about $2.1 billion. This measurement has narrowed over the past year, when Free Cash Flow was $2.24 billion. Its current level translates to a Free Cash Flow Yield of 14.6%. The strength in this metric is a solid counter to the Net Income picture I just described.
Debt to Equity: WLK’s debt/equity ratio is .45, 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 a little over $2.4 billion in the last quarter while long-term debt was about $4.9 billion. The company’s liquidity has improved over the last year, from a little over $11.3 billion. 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 $1.43 per share, which translates to a dividend yield of about 1.27% at the stock’s current price. While the dividend yield is conservative, it should be noted that management announced a 10% increase in its dividend payout in late 2021, from $1.08 per share, and again from $1.19 per share in the third quarter of 2022. I consider a stable, 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 at around $134 per share. That suggests that WLK is nicely undervalued, with about 20% upside from its current price.
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 a June 2022 peak at around $128 to its low, reached in October of last year at around $81; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After staging a new upward trend that peaked at around $125 in February, the stock dropped sharply to a low in March at around $104, and then rallied again to about $122.50 in early May. The stock’s latest pivot low came at the start of June at around $104.50, with the stock rebounding sharply until this week to its latest pivot high, and immediate resistance around $116. Current support should lie at around $110, where the 61.8% retracement line sits. A push above $116 could see the stock rise to about $122.50 before finding next resistance, while a drop below $110 could see the stock fall to about $103, a little below the 50% retracement line before finding secondary support.
Near-term Keys: WLK’s fundamentals, which continue to show signs of strength despite some weakness in operating margins, lend credence to the stock’s value proposition, which is very interesting and warrants a diligent eye. If you’re willing to accept the volatility associated with the stock’s general price action and current market conditions, the stock could offer an interesting value opportunity right now. If you prefer to work with short-term trading strategies, you could use a push above $116 to consider buying the stock or working with call options, using $122 as a useful profit target. You could also use a drop below $110 as a signal to think about shorting the stock or buying put options; in that case, use $103 as a useful area to take profits on a bearish trade.