Investidea: Westlake, because the rise

Инвестидея: Westlake, потому что подъем

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 duration: 12,5% over the next 14 months excluding dividends; 9% annual during 10 years including dividends.

Why stocks can go up: in the United States, an industrial boom in spite of everything.

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. Hopefully, 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 are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

And what about the author's predictions

Research, for example 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 perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline. As with the investment 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:

  1. Vinyls - 79,82%. Segment operating margin - 5,04% from his 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.
  2. Olefins - 20,18%. Segment operating margin - 10,44% from his 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.
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Revenue by country and region:

  1. USA - 67,96%.
  2. Canada - 8%.
  3. Germany - 6,1%.
  4. China - 2,3%.
  5. Italy - 1,37%.
  6. Taiwan - 0,98%.
  7. Others, unnamed countries - 13,29%.

Arguments in favor of the company

Industrial upsurge in the USA. According to the latest data, in the New York metropolitan area, production growth is significantly higher than expected, which allows us to hope for a continuation of the industrial recovery in the United States in the near future. Fresh data from other metropolitan areas has not yet 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 of the company are located in other southern states.

No fresh data yet, but in october in virginia, Texas and Missouri industrial figures were better than expected. Basically, all US regional industrial indexes usually move together, if not influenced by some special circumstances such as natural disasters and epidemics. So growth in the New York metropolitan area almost predicts growth in the South., and industrial growth in the US could 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 the industrial upsurge allow Westlake to increase prices. So that, may be, a couple more blocks Westlake will be able to raise prices for its 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 in arrears, 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 of counterparties' debts. 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. I think, the general gracelessness 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 about ESG metrics: improving energy efficiency, reduction of emissions. All this can attract the ESG lobby to its actions.: it traditionally welcomes companies, whose management has learned neo-Marxist phrases like “Let's hit with a forged corporate boot on the hydra of pollution!"Or at least verbally declares adherence to the" party line ". So, in theory, Westlake stocks can pump on this soil..

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Инвестидея: Westlake, потому что подъем

What can get in the way

Multiple circumstances. Those same logistic gags, which allow the company to increase the margin, can play a cruel joke with her: she herself may suffer from untimely delivery or from the rise in price of this very delivery. You should also take into account the high likelihood of growth in labor costs for employees..

Dividends. The company pays 1,19 $ dividend per share per year, this is 1,15% per annum - it spends 153.51 million dollars on dividends per year. Basically, it's a little - 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 likelihood 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 profitability, so that shareholders begin to sell shares in case of cut 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 powerful new hurricane could severely spoil the company's reporting.. Or maybe not spoil: the recent hurricane had little impact on the company's operations. But still let's 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 affect 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 comes Sustainalytics, which many eco-investors are guided by, gave Westlake a very bad rating: company in 260th place out of 465 in its subgroup of chemical companies.

Need to say, I already suspected this because of the Louisiana work of the company: production facilities in the state are often very toxic, no wonder it was in this state that the Swamp Thing appeared. So Westlake's “ecology” reports may not fool anyone., and even on the contrary: ESG lobby can subject the company to bullying.

What is the bottom line

We take shares now by 102,07 $. And then there are two options:

  1. wait for stocks to rise to the level 115 $, who asked for them back in 2018. I think, we will reach this level in the following 14 months;
  2. keep shares next 10 years pending, that someone will buy the company.
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You can look at the news section on the company's website: suddenly there will be news about the cut in dividends. But I doubt, that such news will greatly affect the quotes: painfully small payments.

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