Is Westlake Stock a Buy? The Materials industry has had something of a difficult time of late. The sector’s decreased this year in line with many other businesses, with the benchmark Vanguard Industrials ETF down nearly 18% thus far in 2022.
However, some companies have performed better than others and leading this charge is Houston-headquartered chemicals and downstream products specialist Westlake. The company’s been breaking records on the financial front recently while also delivering on its broader strategic goals.
Moreover, the firm has seemingly come across the radar of legendary Wall Street investor Stanley Druckenmiller, whose family office took a stake in the company not so long ago.
Interestingly, Druckenmiller’s reputation with regard to stock picking is second to none. And given his outstanding track record of never having had a down year yet, there must be something in Westlake’s set-up that the former Duquesne Capital hedge fund manager likes.
This article will uncover precisely what that is, and examine whether Westlake is still a good buy at its current market price.
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Westlake Is #1 In Lots Of Business
Westlake is a vertically and horizontally integrated global chemicals leader, focusing on Housing and Infrastructure Products (HIP) and Performance and Essential Materials (PEM). The company operates worldwide, and has offices in 23 countries with an employee count of over 16,000.
Its HIP segment is concerned with manufacturing building products for the American market, and enjoys strong brand recognition with such diverse offerings as Westlake Pipe & Fittings, Westlake Dimex, and Westlake Royal Building Products.
The firm is the number one business in several industrial niches, including PVC compounds, pipe fittings and composite roofing.
Similarly, WLK’s PIM segment also features plenty of industry-leading names, such as Westlake European & Asian Chloro-Vinyls, and takes the top spot in the North American low-density polyethylene space.
A big part of WLK’s success is its ability to facilitate a “high degree of product integration.” It does this by leveraging its long-term cost advantage through the abundance of North American supplies of ethane and expands on this by capturing favorable profit margins due to the operation’s superior production chain.
A Record-Breaking Quarter
Westlake set three new milestones in the second quarter of 2022. The company’s net sales improved 57% to bring in $4.5 billion of revenue; its net income grew 64% to deliver a quarterly record haul of $858 million; and, to top it all off, WLK reported an EBITDA of $1.5 billion – which was, again, the largest it had seen for the period thus far.
The primary driver for those improvements was Westlake’s HIP segment, which witnessed a massive 138% increase in its year-on-year earnings over the quarter. Its PIM enterprise is also thriving, having grown 37% during the same time.
Furthermore, each segment has demonstrated significant improvements in how they function too. For example, the Performance and Essential Materials wing managed to locate over 75% of its production capacity in North America, providing additional cost advantages compared to its global rivals.
It also expects to see upward demand growth in the Asia market as that region recovers from its own COVID-19 crisis, while secular trends in housing, wind energy, packaging and aerospace will prove to be tailwinds for the business going forward.
Along with that, Housing and Infrastructure Products is equally as strong as well. This segment is being buoyed by healthy construction and remodel markets, and the long-term prospects for the housing trade look good too.
A decade of under-building – coupled with an increase in positive demographic shifts and a revolution in remote working – is underpinning the long-term fundamentals for the sector as a whole.
Risks: Is The Housing Boom About To Bust?
Westlake’s integrated business model has meant that it’s been able to insulate itself from the rampaging cost inflation that’s tearing through the country right now. And yet, in difficult times, this aspect of its operation has proven to be a major draw for consumers and investors alike.
That said, WLK remains highly reliant on strong and robust economic activity from which to generate its revenues.
Indeed, the company recognizes this reality, noting in its latest earnings presentation that “rising mortgage rates” have conspired to depress new construction efforts. However, WLK also points out that the undersupplied market continues to sustain construction at “more normalized levels.”
But will this status quo last?
Some commentators suggest there’s the possibility of a deeper recession on the cards, which will undoubtedly disrupt house building to a greater degree than is already happening now.
In fact, even Stanley Druckenmiller – who’s given his vote of confidence to WLK by buying a chunk of the company – thinks there will be a “hard landing” next year too.
Still, despite the firm’s exposure to the vagaries of the macroeconomic environment, its record Q2 earnings report implies something inherent to the business has kept it safe so far. Only time will tell if that “something” stands up to more onerous conditions further down the line.
Is Westlake Stock a Buy?
Westlake trades today at a shockingly low share price of just 4.4x forwards earnings – which is far beneath the Materials sector median of 10.4x. As mentioned earlier, its EBITDA growth of 138% is almost unheard of in the industry, and its trailing twelve-month net income margin of 19.0% is also well above par.
What’s most persuasive for potential investors, however, is the manner in which the company is organized. Its highly-integrated structure ensures it can maximize returns much more quickly than its competition, and having such control over its own supply chain means it can continue operating as efficiently as possible.
And finally, there’s another cherry on the cake in the form of WLK’s 1.62% yielding dividend – which just got a 20% rise earlier in August. All-in-all, Westlake is a quality business that will surely reward its shareholders for many years to come.
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