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Westlake Chemical to Gain on Acquisitions & Strong Demand

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We issued an updated research report on Westlake Chemical Corporation (WLK - Free Report) on Dec 31.

Acquisitions to Drive Growth

Westlake Chemical is well placed to benefit from the Axiall acquisition. The buyout has led to diversification of its product portfolio and geographical operations and created a North American leader in Olefins and Vinyls. The company has realized $275 million of cost reduction synergies and savings since the completion of the buyout.

Westlake Chemical, in September 2018, made an exclusive binding offer to buy the global compounding solutions business, NAKAN, from Los Angeles-based private equity firm, OpenGate Capital. The company expects the transaction to close by early 2019.

According to Westlake Chemical, the combination of NAKAN with the existing compounding business is an appropriate strategy, which will enable the company to broaden the compounding business globally as well as add important technology and specialty products to the current portfolio.

Robust Demand for Major Products

Westlake Chemical is witnessing higher global demand for all major products in the Vinyls and Olefins segments. The company is seeing favorable demand trends for all of its major products including polyethylene, PVC resin and caustic soda. Moreover, higher prices for caustic soda along with increased sales volumes of PVC resin, caustic soda and polyethylene boosted the top line in the third quarter. Investments to improve reliability and operational efficiency of assets will allow the company to fully leverage the improving fundamentals in the Vinyls market.

A Few Headwinds

Westlake Chemical purchases a significant quantity of feedstocks such as ethane, natural gas and ethylene. It is witnessing higher feedstock and energy costs. Increased ethane feedstock costs weighed on the Olefins segment in the third quarter. The company expects volatility in ethane prices to persist in the fourth quarter and in 2019.

Moreover, the company’s operations are exposed to planned turnarounds and unplanned outages. Operating margins in the olefins segment fell on year-over-year basis in the first nine months of 2018, partly due to the impacts from turnaround activities. The company expects turnaround and maintenance activity in the fourth quarter to be in line with the third quarter and include roughly $10-million impact from outages at the Plaquemine facility.

Price Performance

Shares of Westlake Chemical have lost 38.9% in a year’s time compared with the industry’s 37.9% decline.

Zacks Rank & Stocks to Consider

Westlake Chemical currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the basic materials space are Ingevity Corporation (NGVT - Free Report) , The Mosaic Company (MOS - Free Report) and Israel Chemicals Ltd. (ICL - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ingevity has an expected long-term earnings growth rate of 12%. The company’s shares have gained 18.7% in the past year.  

Mosaic has an expected long-term earnings growth rate of 7%. The company’s shares have moved up 10.6% in the past year.

Israel Chemicals has expected long-term earnings growth rate of 9.5%. Its shares have rallied 38.7% in a year’s time.

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