Sustainable Innovations And Aggressive Cost Savings Spearhead Stellar Growth Path

Key Takeaways

• Westlake's focus on sustainability and innovation in products like PVCO pipe positions it for long-term growth amidst rising consumer demand for eco-friendly products.
  
• Aggressive cost savings and strategic acquisitions are set to improve net margins and earnings, reflecting a forward-looking operational strategy.
  
• External factors like slow macroeconomic recovery, adverse weather, raw material costs, and increasing competition pose risks to Westlake's revenue and margins.

Catalysts

Engages in the manufacture and marketing of performance and essential materials, and housing and infrastructure products in the United States, Canada, Germany, China, Mexico, Brazil, France, Italy, Taiwan, and internationally.

• The record quarterly results for the HIP segment, coupled with higher volumes led by pipe fittings and siding and trim, reveal a direct operational catalyst for future revenue growth. This suggests that as residential construction and infrastructure spending continue, these product lines are expected to continue contributing positively to revenue.
  
• Volume gains in both the HIP and PEM segments indicate a comprehensive operational strength across Westlake's portfolio, which is expected to impact future growth positively by increasing sales volumes and potentially improving net margins through optimized sales mix.
  
• The benefits of vertical integration, as evidenced by improved PVC sales volumes and margins due to strong demand in the HIP segment, highlight an operational reason for stock undervaluation. This strategic integration is likely to continue impacting future growth by enhancing efficiencies and margins.
  
• Continued investment in sustainability and new product innovations, such as PVCO pipe, points towards long-term growth potential in response to increasing consumer demand for sustainable products. This focus on sustainability is expected to drive revenue growth and enhance the company's competitive positioning.
  
• Westlake's aggressive cost savings initiative, which delivered approximately $50 million of savings in the second quarter alone, represents an operational mechanism for improving net margins. The pursuit of acquisition synergies and a cost-effective business model underscore a forward-looking strategy expected to bolster net income and earnings over time.

Assumptions

• Analysts are assuming Westlake's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $10.37) by about August 2027, up from $272.0 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 13.9x on those 2027 earnings, down from 67.8x today. This future PE is lower than the current PE for the US Chemicals industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.69% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Risks

• Slower-than-expected global macroeconomic recovery and slowing demand in U.S. housing and Chinese markets could lead to decreased demand for Westlake's products, impacting revenue and sales volume.
  
• A series of hurricanes and adverse weather conditions in North America have the potential to disrupt production and supply chain logistics, affecting product delivery and possibly leading to increased operational costs.
  
• Westlake's proactive actions in Europe, including the mothballing of the epoxy business unit in the Netherlands, may lead to significant pretax costs that could negatively affect net margins in the short term.
  
• The company's reliance on volatile raw material costs, such as ethane and ethylene, could impact profit margins if prices rise unexpectedly.
  
• Increasing competition and pricing pressures in both the HIP and PEM segments could erode market share and pressure sales prices, impacting revenue and earnings.

Valuation

• The analysts have a consensus price target of $158.66 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 $185.0, and the most bearish reporting a price target of just $123.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.2 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $143.47, the analyst's price target of $158.66 is 9.6% 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.