Today we have a speculative investment aide: take shares of the American chemical industry company Westlake (NYSE: WLK), to make money on the growth of orders in this area.
Growth potential and validity: 12,5% over the next 14 months excluding dividends; 9% per annum during 10 years including dividends.
Why stocks can go up: US industrial boom against all odds.
How do we act: we take shares now by 102,07 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company is engaged in the production of chemical materials. According to the annual report, its revenue structure looks like this:
- Vinyls - 79,82%. Segment operating margin — 5,04% from its proceeds. This segment is divided into two parts: caustic soda and building materials. The Caustic Soda portion brings 60,09% of the company's total revenue - these are solutions for coatings and industrial applications. Part "Building materials" brings 19,73% from the entire proceeds of the company are chemical components for the production of pipes, doors, lunch.
- Olefins - 20,18%. Segment operating margin — 10,44% from its proceeds. Here the company sells the following products: polyethylene, which brings 16,33% from all proceeds, and styrene, which brings 3,85% from all proceeds.
Revenue by country and region:
- USA - 67,96%.
- Canada - 8%.
- Germany - 6,1%.
- China - 2,3%.
- Italy — 1,37%.
- Taiwan - 0,98%.
- Other, unnamed countries - 13,29%.
Arguments in favor of the company
Industrial rise in the USA. According to the latest data, in the New York industrial agglomeration, production growth is significantly higher than expected, which allows us to hope for a continuation of the industrial recovery in the US in the near future. Fresh data from other agglomerations has not yet been pulled up. But, Considering, that most of Westlake's manufacturing facilities are located in southern Louisiana, it can be assumed, that a considerable number of customers the company has located in other southern states.
No fresh data yet, but in October in Virginia, Texas and Missouri industrial numbers were better than expected. Basically, all US regional industrial indexes usually move together, unless some special circumstances such as natural disasters and epidemics affect. So growth in the New York metropolitan area almost predicts growth in the South., and industrial growth in the United States may mean an increase in the company's financial performance.
At least someone is good. Logistic gags, from which the entire real sector suffers, coupled with industrial boom allow Westlake to increase prices. So that, may be, a couple of blocks Westlake will be able to raise prices for their products.
Inexpensive. P / S for the company is 1,3, a P / E — about 8,89. It's inexpensive by any measure..
Healthy bookkeeping. According to the latest report, the company has 9.239 billion dollars of debt, which is quite a lot, 1,898 billion of this amount of debt must be repaid within a year. But Westlake has a lot of money at its disposal.: 3,571 billion in accounts and 1.642 billion debts of counterparties. So that, in theory, the company should have enough money for everything.
Can buy. Notable competitors of the company are petrochemical enterprises such as Exxon and Chevron. Think, the general bleakness of the oil business may inspire them to buy Westlake, to leverage your most predictable part of the business. Especially considering the Westlake benefits listed above, as well as its relatively low cost.: the company's capitalization is $ 13.05 billion.
Blah blah blah saving the planet. The company reports a lot on ESG metrics: improving energy efficiency, reduction of emissions. All this can attract the ESG lobby to its shares: it traditionally welcomes companies, whose leadership learned neo-Marxist slogans like "Let's hit the pollution hydra with a forged corporate boot!” or at least verbally declares adherence to the “party line”. So in theory, Westlake stock could pump up on that ground..
What can get in the way
Multiple circumstances. Those same logistic plugs, which allow the company to increase the margin, can play a cruel joke on her: she herself may suffer from untimely delivery or from a rise in the price of this very delivery. You should also take into account the high probability of rising costs for the cost of labor of workers..
Dividends. The company pays 1,19 $ dividend per share per year, this 1,15% per annum - it spends 153.51 million dollars on dividends per year. Basically, it's a bit - about 16,5% from her profits for the past 12 Months. But, Considering, that the company is actively spending on expansion and there is always the possibility of an unpleasant surprise such as a new large-scale quarantine, you need to be mentally prepared for the news about the cancellation of dividends and the fall of shares. On the other hand, there is not such a steep return, so that shareholders start selling shares in case of cuts in payments.
«Here I am! Rock you like a hurricane!» The main production facilities of the company are located in the southern United States. To make up for the universal injustice, the gods cursed the southern states and gave their coast to the power of the elements: floods and hurricanes are common there. In theory, a new powerful hurricane can greatly spoil the company's reporting. And maybe not spoil: the recent hurricane did not greatly affect the company's operations. But we'll still keep it in mind.
The property. The construction sector provides a significant share of the company's sales, and any drop in activity there could negatively impact Westlake's reporting.
Pump this, pollutant. There is still no single methodology for assessing ESG indicators - so all rating agencies give companies different ratings. But here's Sustainalytics, which many eco-investors are guided by, gave Westlake a very bad rating: a company ranked 260 out of 465 in its chemical subgroup.
Need to say, I already suspected this because of the Louisiana work of the company: production in the state is often very toxic, no wonder it was in this state that the Swamp Thing appeared. So Westlake's "environmental" reports may not deceive anyone., and even opposite: ESG lobby can subject the company to bullying.
What's the bottom line?
We take shares now by 102,07 $. And then there are two options.:
- wait for stocks to rise to the level 115 $, who asked for them back in 2018. Think, we will reach this level in the following 14 Months;
- keep shares next 10 years pending, that someone will buy the company.
You can look at the news section on the company's website: suddenly there will be news about cutting dividends. But I doubt, that such news will greatly affect quotes: too small payouts.
