2023-07-24 06:06:52 ET
Summary
- Westlake Chemical Partners LP has seen a 70% QoQ increase in net income, reaching $394 million, and maintains a robust balance sheet with $2.4 billion in cash.
- The company operates in two segments, Performance and Essential Materials and Housing and Infrastructure Products, with PEM generating the majority of revenues at $2.3 billion.
- Despite concerns over third-party ethylene margins, WLKP's strong financial position and high dividend yield make it an attractive option for investors seeking a dividend income stock.
Investment Rundown
Operating in the commodity chemicals industry Westlake Chemical Partners LP ( WLKP ) has grown into a global manufacturer and supplier of various materials that according to themselves "enhance life every day". Operations exist in North America, Europe, and Asia. They have a lot of exposure with many end markets seeing as they supply the building blocks for solutions in housing and construction but also in healthcare and automotive.
The bottom line in Q1 FY2023 made a huge jump on a QoQ basis, 70% to be exact. The net income reached $394 million and the company maintains a robust balance sheet with $2.4 billion in cash, 3x the current market cap. What you seem to be getting with WLKP is a solid business that is growing at the back of many end markets placing demand. For investors that want a dividend-oriented business yielding over 8% and also boasting a fanatics balance sheet, the WLKP ticks all those boxes. I am rating the company a buy for the quite obvious reasons I stated.
Company Segments
In Westlake, two different segments make up the business. These are as follows Performance and Essential Materials ((PEM)) and Housing and Infrastructure Products ((HIP)). Between the two the largest amount of revenues are coming from PEM, where they generated $2.3 billion in sales, down on a YoY basis by around 17%. As for what WLKP stated regarding this decrease they made note that Q1 of 2023 compared to Q1 of 2022 has significantly lower materials average selling prices. This means that revenues for WLKP are quite driven by what the commodity prices are currently. That brings some volatility into earnings and also some risks as the company needs to balance and act efficiently in the face of such challenges.
Segment Results (Earnings Presentation)
But the segment also showed some positive signs. The global demand for the segment rose and feedstock and energy prices were lower in Q1 2023 than a year prior. To me that indicates that if we see a recovery in prices then the margins might go along and grow higher. TTM net margins are 4.09%, which is under the average of 5.46% that WLKP has in the last few years.
Tailwinds (Earnings Presentation)
The smaller of the two segments experienced some difficulties in the quarter. The softer housing market in the US is impacting revenues negatively. Recently there is a lower activity in the market and with fewer house constructions started it lowers the demand for the HIP segment. But the housing market is of course somewhat volatile as it goes along with the broader health of the economy. When interest rates rise the likelihood is that economic activity is going to slow, and that includes house construction. But what will be a long-term tailwind for WLKP is the fact that the US needs to upgrade its infrastructure condition drastically. This will give a long runway of demand and with a good market position, WLKP seems more ready than ever to capture it.
Upcoming Earnings
On August 3 2023 WLKP is set to release its Q2 results for FY2023. The results are being released before the markets open and I think what many investors will be looking at is whether WLKP has been capable of maneuvering efficiently in a still difficult market. By that I mean a continued momentum in the bottom line as they preserve or even expand upon margins.
EPS History (Seeking Alpha)
The EPS estimates sit at $0.39 which would inside a QoQ decline, but as the US economy remains strong I think there is a possibility that we see further demand for the side of WLKP.
Risks
In 2022, third-party margins began to experience mounting pressure, and this trend is expected to persist through 2023. The challenging economic landscape and evolving market dynamics have led to uncertainties surrounding third-party ethylene margins. As a result, there are growing concerns that these margins may face additional strain in the coming year.
Looking ahead, the company's predictions indicate that third-party ethylene margins in 2023 might even dip below the fixed 10-cent rate it currently receives with WLKP. Such a scenario could present significant challenges to the company's profitability and overall financial performance.
Pressured margins are likely to help in suppressing the valuation that WLKP receives. But once margins rebound then the share price for WLKP is likely to quickly follow and this moment now should be viewed as a great time to be buying up shares.
Financials
As I hinted at the beginning part of the article the balance sheet of WLKP is incredibly strong. The p/b sits at just 1.49. WLKP boats a massive cash position given its market cap, valued at $2.4 billion.
Balance Sheet (Earnings Report)
The total assets are also twice as much as the total liabilities which presents more value to shareholders. The high amount of equity has netted them a ROE of 11.76% and the ROA sits at 4.68%.
This strong position that WLKP operates from has lent them able to distribute a high dividend yield. The yield sits at 8.39% and the payout ratio is over 100%, which is worrying but we need to realize that WLKP also has a large cash position it can tap into for these distributions. The history of the dividend has been very consistent, but it hasn't been raised since 2020. I don't find this worrying though as the yield is so high and having some consolidation is not wrong either.
Final Words
Investors seeking a dividend income stock that has broad exposure to many end markets should be considering WLKP right now. The share price is slightly down YTD and trades at a p/e of 13 only. Given the financial stability of the company, I find the high yield sustainable. But I wouldn't be expecting any significant growth in the coming quarters, at least not until the average selling prices for the PEM segments recover. But as I view WLKP as a long-term opportunity I am still rating them a buy now.
For further details see:
Westlake Chemical Partners: Strategically Positioned To Benefit From Megatrends