Reducing Costs And Expanding HIP Will Support Operational Reliability

Key Takeaways

• Optimizing manufacturing and reducing costs are key strategies that could enhance efficiency, profitability, and support future earnings growth.
  
• Strengthening the Housing and Infrastructure Products segment and strategic investments position Westlake for revenue and EPS growth despite a weaker housing market.
  
• Increased costs and global challenges, including energy expenses, market demand shifts, and trade tensions, are compressing margins and affecting revenue stability for Westlake.

Catalysts

Manufactures and markets performance and essential materials, and housing and infrastructure products in the United States, Canada, Germany, China, Mexico, Brazil, France, Italy, and internationally.

• Westlake is focused on optimizing its manufacturing footprint and improving operational reliability, which should reduce costs and enhance efficiency. This is expected to positively impact future earnings and net margins.
  
• The company is actively working on reducing its cost structure, with a raised cost reduction target for 2025, which could alleviate pressure on net margins and improve profitability.
  
• Westlake has completed significant turnarounds at its ethylene plants, which, by enhancing production reliability, should support more stable revenue and potentially higher future earnings.
  
• Expanding and diversifying its Housing and Infrastructure Products (HIP) segment, even amid a weaker housing market, positions Westlake for revenue growth through market share gains and robust demand for building products.
  
• Westlake's strong investment-grade balance sheet with significant cash reserves allows for strategic investment in growth opportunities or share buybacks, which could support future earnings per share (EPS) growth.

Westlake Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Westlake's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $7.1) by about May 2028, up from $385.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 26.3x today. This future PE is lower than the current PE for the US Chemicals industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Westlake Future Earnings Per Share Growth

Risks

• Higher North American feedstock and energy costs increased by approximately $100 million year-over-year, affecting net margins.
  
• Planned turnarounds and unplanned outages resulted in an $80 million EBITDA impact, leading to extraordinary margin compression and reduced earnings.
  
• Winter storms and higher mortgage interest rates slowed home construction, impacting revenue from the Housing and Infrastructure Products segment.
  
• Lower global demand for PVC resin and polyethylene in the PEM segment caused a decline in sales volume, negatively affecting revenue.
  
• Global trade tensions and tariffs have increased volatility in commodity prices and currency rates, which may continue to challenge revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $105.0 for Westlake based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $122.0, and the most bearish reporting a price target of just $82.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.4 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $78.83, the analyst price target of $105.0 is 24.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.