Three Pillar Plan And Housing Tailwinds Will Transform Earnings Quality

Catalysts

About Westlake

Westlake is a global producer of performance and essential materials and housing and infrastructure products that serve construction, industrial and municipal end markets.

What are the underlying business or industry changes driving this perspective?

• Execution of the 3 pillar plan, including footprint optimization, plant reliability and structural cost reductions, is expected to lift earnings by a planned $600 million in 2026. This directly targets EBITDA and net income.
• Closure of higher cost chlorovinyl, styrene and epoxy assets that were selling into low priced export markets reduces exposure to weaker global trade flows and concentrates volume in more profitable channels. Management expects this to support PEM EBITDA by about $100 million and improve segment margins.
• Housing and infrastructure spending, including municipal pipe projects across North America and expected steady U.S. housing starts in the 1.3 million to 1.4 million range, provides HIP with a broad demand base for its pipe, fittings and exterior building products. This directly underpins revenue and EBITDA guidance of US$4.4b to US$4.6b with 19% to 21% margins.
• Internal integration between PEM and HIP, including PVC resin flowing into higher value downstream products and the ACI compounding acquisition, supports a more self contained value chain that can capture margin at multiple steps. This can help stabilize gross margin and EBIT through cycles.
• Reduced capital spending in 2026 to about US$900 million, closer to the depreciation run rate, together with US$2.9b of cash and securities and a 16 year average debt maturity, gives management room to prioritize cost savings and operational improvements. This can translate into stronger free cash flow and potentially higher earnings quality.

Assumptions

This narrative explores a more optimistic perspective on Westlake compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Westlake's revenue will grow by 6.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -13.4% today to 4.1% in 3 years time.
• The bullish analysts expect earnings to reach $546.5 million (and earnings per share of $4.21) by about March 2029, up from -$1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $263.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 38.2x on those 2029 earnings, up from -9.7x today. This future PE is greater than the current PE for the US Chemicals industry at 29.0x.
• The bullish 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 8.18%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global overcapacity in key Performance and Essential Materials products such as polyethylene and the chlorovinyls chain has already pressured prices and margins. If this remains a long-running feature of the industry, Westlake could face a structurally lower pricing environment that keeps PEM EBITDA and segment margins under strain.
• Housing and construction are central to the Housing and Infrastructure Products segment, and management is counting on housing starts in the 1.3 million to 1.4 million range plus ongoing municipal pipe demand. Any prolonged weakness in residential construction activity or slowdown in infrastructure spending would directly weigh on HIP revenue and EBITDA margins.
• The company is relying heavily on a US$600 million earnings improvement in 2026 from its 3 pillar plan and has already booked sizeable identified items of US$511 million tied to plant closures. If structural cost savings, footprint optimization and reliability gains do not fully materialize or prove hard to sustain, overall earnings and net income could remain weaker than management’s targets.
• Westlake is shrinking its exposure to low priced export markets by closing higher cost PEM assets, which reduces volume and product reach. If domestic or higher margin channels do not absorb this capacity over time, the company could see lower overall sales and underutilized integration benefits, which would limit revenue growth and pressure net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Westlake is $130.0, which represents up to two standard deviations above the consensus price target of $110.86. This valuation is based on what can be assumed as the expectations of Westlake's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $130.0, and the most bearish reporting a price target of just $80.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $13.3 billion, earnings will come to $546.5 million, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $114.22, the analyst price target of $130.0 is 12.1% 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.