FXZ - Westlake Corporation: Shares Priced Cheaply With Momentum Ahead Of Earnings Thursday

Summary

• This earnings season has been a mixed bag - companies missing estimates have been punished relative to the S&P 500 strong return.
• Westlake features expensive options but cheap shares ahead of its Q3 report.
• I see more upside risks that both short-term traders and long-term investors can pounce on.

Earnings season continues after a big tech trainwreck last week. Interestingly, stock price reactions were not particularly bad. In aggregate, though, firms that have missed top and bottom-line estimates have gotten crushed relative to the S&P 500's strong returns recently.

You Better Not Miss

The sector earnings picture broadens out this week, and one Chemicals name reports earnings Thursday morning and has a slew of speaking events this month.

Top Earnings This Week

According to Bank of America Global Research, Westlake (WLK) is a petrochemicals producer with revenue of over $11.5bn in 2021 in two businesses: olefins and vinyls. The olefins business produces ethylene, polyethylene, and coproducts. The vinyls business produces PVC and sells caustic soda.

The Houston-based $12.4 billion market cap Chemicals industry company within the Materials sector trades at a low 4.4 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.5% dividend yield, according to The Wall Street Journal. Importantly ahead of earnings, the stock has a 7.7% short interest.

Westlake is positioned well to benefit from a near-term tight chlor-alkali and vinyls markets per BofA. Strong secular demand persists and should support earnings growth. Ongoing outages and supply issues put upward pressure on prices, which helps the producer. Downside risks include weakness in emerging markets, weaker commodity prices (which could eat away at margins), and capacity constraints.

On valuation, analysts at BofA see earnings rising sharply in 2022 but then retreating big next year. Market conditions should then stabilize into 2024 with EPS back on trend. Dividends are seen as more stable, however, with a higher payout expected over the next two years. Both the operating and GAAP P/Es look good right now and when using forward estimates. Also, despite per-share profit volatility, Westlake generates strong free cash flow which should help promote shareholder accretive activities. Overall, I like the valuation here, and Seeking Alpha rates it with a strong A-.

Westlake: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, WLK has a confirmed Q3 2022 earnings date of Thursday, Nov. 3 BMO with a conference call later in the morning. You can listen live here . Seeking Alpha shows a consensus EPS forecast of $4.32 with $4.02 billion in forecast revenue.

Corporate event data from Wall Street Horizon show a busy month ahead with the firm's management team speaking at a whopping four conferences. So, there could be share price volatility throughout November.

Corporate Event Calendar

The Options Angle

Digging into the earnings report, Option Research & Technology Services (ORATS) show an implied stock price change of 6.2% after Wednesday morning's results hit the tape using the nearest-expiring at-the-money straddle. That is about in line with previously anticipated moves, though the stock has a history of much smaller earnings-day swings. So, being a net seller of option premium could make sense here. With a positive trend in earnings reactions, going short puts could be the play.

WLK: Expensive Options Into Earnings Wednesday

The Technical Take

WLK has a few key price levels to watch into and after earnings. Notice in the chart below that shares recently bounced off key support near $80 - which was a low during the middle of last year and is where the slightly rising 200-week moving average lies. The thrust came on big bullish volume, too, so there could be more legs to the move. I see resistance, though, in the $105 to $110 area. Long term, the stock notched a bearish double-top pattern near $140, but that feature may have been completed with a more than 40% drop to the September low. Overall, I think the stock can climb back to near $105 after earnings.

WLK: Share Bounce Off Support On Strong Volume

The Bottom Line

Westlake has a great valuation and favorable near-term chart setup ahead of earnings. I am bullish here with a near-term target of $105, but longer term, I think the prior high could be in play based on the company's low P/E and solid free cash flow.

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