Building Texas PVCO Plant And Reducing Costs Will Strengthen Future In HIP And PEM Segments

Key Takeaways

• Strategic expansions in the HIP segment and new plant construction boost revenue potential and market leadership in North America.
  
• Cost-reduction initiatives and flexible financial reserves enhance earnings stability and potential shareholder value long-term.
  
• Operational and legal challenges, competitive pressures, and global trade uncertainties could impact Westlake's earnings, profitability, and financial stability.

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's continued construction of a new PVCO pipe plant in Texas supports strong customer demand and provides growth potential in the HIP segment, potentially increasing revenues.
  
• Decisive actions to reduce structural costs, such as mothballing certain units and company-wide cost-saving initiatives, are expected to result in $125 million to $150 million in cost savings in 2025, potentially improving net margins.
  
• The strategic focus on expanding the HIP segment, which delivered record income and EBITDA margin in 2024, positions Westlake to leverage its leading North American market position, likely enhancing earnings stability and growth.
  
• Westlake's global competitiveness in the PEM segment, driven by export market demand and increased production, is expected to be enhanced by demand growth in end markets such as packaging and construction, potentially boosting revenues and earnings.
  
• A solid investment-grade balance sheet with substantial cash reserves provides Westlake the flexibility to pursue growth opportunities strategically, which could enhance long-term earnings and shareholder value.

Westlake Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Westlake's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $10.55) by about April 2028, up from $599.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Chemicals industry at 19.9x.
• 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 7.65%, as per the Simply Wall St company report.

Westlake Future Earnings Per Share Growth

Risks

• Westlake's decision to mothball two units and record a substantial noncash impairment charge of $475 million related to the epoxy business indicates operational challenges and potential long-term difficulties in the European market, which could adversely impact future earnings.
  
• The reduction in average sales prices due to increased capacity in the PEM segment suggests competitive pressures and potential pricing challenges, which could affect revenue growth and profitability.
  
• The $150 million charge to resolve certain liability claims reflects exposure to legal and operational risks, which might strain net margins and impact the company's financial stability.
  
• Expected margin compression in the HIP segment due to product mix shifts highlights potential profitability constraints, which could affect net income growth despite the segment's revenue growth.
  
• Discussion around potential tariffs and trade challenges for PVC exports raises uncertainties about the global demand environment, which could pose risks to PEM segment revenues and overall earnings stability.

Valuation

• The analysts have a consensus price target of $130.062 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 $155.0, and the most bearish reporting a price target of just $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.0 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of $99.98, the analyst price target of $130.06 is 23.1% 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.