Westlake is Wednesday's IBD Stock Of The Day as the Houston-based company joins the list of chemical companies holding firm in a tough market that are worth a look. WLK stock, though off slightly in today's stock market action, is within striking distance of a buy point.
Ashland Global and Cabot, two other chemical stocks recently featured as IBD Stock Of The Day, are part of the IBD Leaderboard portfolio of elite stocks.
Acquisition Binge
On the May 3 Q1 earnings call, CEO Albert Chao touted the Westlake's $3.8 billion worth of acquisitions since mid-2021 "to significantly expand and drive specialization and diversify our portfolio of branded products."
For the $17.2-billion-market-cap company, the scope of the deals highlights "the magnitude of the transformation we've undertaken."
The latest deal, in February, was a $1.2-billion all-cash deal for Hexion's global epoxy business. That provides exposure to growth areas like wind turbines and light-weighting of automobiles. That fits into Westlake's performance and essential materials segment, which accounted for $10.66 billion in revenue over the past four quarters, or 75% of the total. The other three deals all in the last half of 2021 filled out Westlake's housing and infrastructure products segment, which brought in $3.72 billion in revenue over the past year.
Pricing Strength
Including its acquisitions, Westlake saw revenue jump 72% from a year ago to $4.056 billion in Q1. That reflected volume increases of 26% and price increases of 46%.
In its latest company presentation Westlake highlights long-term underinvestment in PVC and caustic soda capacity as positives for the pricing outlook.
Cyclical Risk
A key question, given Westlake's significant exposure to housing, is whether it will continue to lead its industry group and the broad market as the Federal Reserve aims to wrestle down inflation.
On Wednesday, JPMorgan analyst Jeffrey Zekauskas downgraded Westlake stock to neutral from overweight, while bumping up his price target to 135 from 134.
Zekauskas noted that the risk of recession may weigh on more cyclical chemical companies like Westlake, while less cyclical players could benefit. Among companies in the latter group, Linde looks interesting and is flirting with a buy point.
Westlake Stock
In Wednesday afternoon action, Westlake stock slipped 1.5% to 131.92. Westlake has been etching out a flat base following a rally sparked by its big Q1 earnings beat. The flat base should be formed after Thursday's close, with an official buy point of 141.29.
Arguably, a move above the 136-137 area would offer an early entry into WLK stock.
Westlake's big run really started in mid-February, helped by its low-cost position in North America amid a spike in natural gas prices sparked by Russia's invasion of Ukraine.
During the run, Westlake has twice pulled back to its 50-day line, finding solid support.
However, as cyclical concerns build, it's worth noting that Westlake's relative strength line, the blue line in accompanying charts that tracks its progress vs. the S&P 500, has come off its highs in recent weeks. That's contrary to some other chemical stocks whose RS lines are hitting new highs. But the RS line for WLK stock is not far from all-time levels.
