Westlake Chemical -- Sell Off Based on Industry Peak Fears Premature

8/6/2019 Westlake Chemical -- Sell Off Based on Industry Peak Fears Premature

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J. Stephen Castellano Ascendere Associates LLC

[email protected] Page 1 www.ascenderellc.com

Ascendere Associates LLC

August 2, 2011

Westlake Chemical (WLK) -- Decline on Industry Peak Fears Premature

Overview

Westlake Chemical (WLK) was the worst-performing stock in our long model portfolio today, down -9.8%, despite

reporting a 2Q11 quarterin line with consensus accompanied by an impressive surge in ROIC to 24.6% from 17.9% in the

previous quarter and 10.3% last year.

The general volatility in the global economy as well as industry-specific price and volume volatility is what seems to be

sending the price of WLK shares down.

However, despite a challenging industry environment the company has delivered impressive returns on invested capital,

and in our opinion there is still a chance for ROIC upside relative to current levels and relative to implied consensus

forecasts later in the year. In addition, we think investors may be overly negative on expectations for volumes and

pricing later in the year.

As a result, we believe WLK as an investment deserves the benefit of the doubt until proven otherwise. As it relates to

our model portfolio strategies, we intend to hold it the stock and reassess the relative attractiveness of the position at

the end of the month -- as we do with all of our stock positions.

NYSE:WLK LTM FY+1 FY+2 LTMInsiders

Stock Price $47.51 EPS: 4.67$ EPS: $4.42 EPS: $4.48 ROE: 20.5% Own 0.6%

EBITDA/ Number of Market Cap $3.2b P/E: 10.2 P/E: 10.7 P/E: 10.6 Capital 38.8% Analysts 10

EBIT Debt to

Enterprise Val $3.2b P/CF 5.0 P/CF 5.0 P/CF 4.9 Margin 15.4% Captial 31.4%

NI Dividend

Beta 1.68 P/S: 0.9 P/S: 0.9 P/S: 0.8 Margin 9.2% Yield 0.5%

Source: Capital IQ consensus and f inancial data.
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Details:

Westlake Chemical (WLK) was the worst-performing stock in our long model portfolio today, down -9.8%, despite

reporting a 2Q11 quarterin line with consensus accompanied by an impressive surge in ROIC to 24.6% from 17.9% in the

previous quarter and 10.3% last year.

The decline in the stock seems to reflect concerns that volume and price conditions have peaked for the company even

while it is planning to embark on a significant capital spending program that will fully integrate its polyethylene

production to natural-gas based feedstock.

Sellers of the stock seem to be focusing on the margin compression relative to 1Q11, recent price declines, fears of

slowing export volumes and cynicism regarding near-term industry price increases and expectations for lower feedstock

stocks later in the year, while ignoring the most important metric -- the impressive surge in its profitability relative to its

operating capital.

Consensus forecasts currently imply that ROIC is set to peak in 3Q11 and decline next September to about 20%, which

we estimate is nearly 2x its cost of capital. However, if industry price increases stick, feedstock prices and oil prices

stabilize or drift higher again, we think there is a reasonable chance of further ROIC expansion beyond 3Q11.

In other words, we think management has done an excellent job in navigating a challenging environment and, until

proven otherwise or until there is a relatively compelling better idea, it should be given the benefit of the doubt. We do

not see today's report changes the relative attractiveness of the stock at the current moment. We believe this is

especially so given that the only selling at 1x sales and 11x earnings, as well as the flexibility that the $837m in

unrestricted and restricted cash provides it versus its $765m debt.

In more detail, we note that on the conference call management stated that current market conditions, expect further

decline of polyethylene prices in July, however inventory adjustments and other factors that led to the decline in prices

have now run their course, and industry has announced price increases for August and September due to higher

domestic and global demand and higher domestic ethylene prices

Based on the conference call, today's sell-off seems driven in part by negative bias related to management comments on

a $0.04/lb giveback of an early-June $0.06/lb price increase in polyethylene prices caused by inventory destocking andlower industry exports and rising ethane feedstock prices. The volatility in prices may be causing some cynicism

on$0.02/lb and $0.03/lb industry increases planned for August and September. The cynicism may not be baseless, but in

our opinion it is not actionable as a sell signal. This is because managements' strong track record of delivering solid

results in challenging environments in our opinion provides it with some leeway.

We also think a short-term focus on near-term industry price swings may be clouding the importance of its long-term

advantage in having access to shale-based natural-gas feedstock, which seems likely to be continue to be more cost

competitive than oil-based naphtha feedstock for some time.

Despite the increasing negative bias seen in the price of the shares, we do not see earnings estimates decline much due

to language of planned price increases in August and September. Instead, we would expect any cautious analysts todowngrade the stock while maintaining estimates. If we are right, this will have little impact to our relative analyst

revision rankings for the company.

In summary, the general volatility in the global economy as well as industry-specific price and volume volatility is what

seems to be sending the price of WLK shares down today. However, despite all of this the company has delivered

impressive returns on invested capital, and in our opinion there is still a chance for ROIC upside relative to current levels

As a result, we believe WLK as an investment deserves the benefit of the doubt until proven otherwise. As it relates to
http://www.westlake.com/fw/main/default.asp?DocID=68&reqid=1591585http://www.westlake.com/fw/main/default.asp?DocID=68&reqid=1591585http://www.westlake.com/fw/main/default.asp?DocID=68&reqid=1591585


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our model portfolio strategies, we intend to hold it the stock and reassess the relative attractiveness of the position at

the end of the month -- as we do with all of our stock positions.

Westlake Chemical Corp. 500 499 498 497 496WLK 2000 1999 1998 1997 1996

Materials

Commodity Chemicals

500

6/30/2011 # Estimates Forecast Actual Variance LTM Margin

Gross Revenue 8 924$ 925$ 1$

High 960$ (35)$

Low 871$ 54$

EBIT 7 138$ 138$ 0$ 15.4%

High 159$ (21)$

Low 117$ 21$

EPS quarter 9 1.19$ 1.21$ 0.02$

High 1.41$ (0.20)$

Low 1.00$ 0.21$

Shares Outsanding 67 67 -

Diluted Shares Outsanding 110

Source: consensus estimates via Capital IQ

Source: Capital IQ data and estimates, and Ascendere Assoc iates data and estimates.

Margins 9/29/12 6/29/12 3/30/12 12/31/11 9/30/11 Trend 6/30/11 3/31/11 12/31/10 9/30/10 6/30/1

Revenue growth 3.8% 6.0% 8.3% 9.1% 18.1% 1 13.0% 11.4% 26.2% 23.3% 42.4%

Gross margin 19.3% 20.2% 18.9% 19.2% 19.5% (2) 18.1% 19.3% 20.3% 17.3% 15.4%

SG&A & Other margin 6.2% 6.2% 6.2% 6.2% 6.2% (3) 6.2% 6.2% 6.9% 7.1% 6.5%

R&D margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EBITDA margin 16.7% 17.4% 16.2% 16.8% 16.9% (1) 18.5% 20.0% 19.0% 17.9% 16.1%

Depreciation margin 3.6% 3.6% 3.6% 3.6% 3.7% (1) 3.5% 3.8% 2.2% 4.1% 3.9%

EBIT margin (or EBT) 13.1% 14.0% 12.7% 12.2% 13.2% (2) 15.0% 16.2% 16.8% 13.8% 12.2%

Income (excluding exceptions) 7.7% 8.3% 7.4% 7.0% 7.7% (2) 8.6% 9.3% 9.9% 7.8% 6.9%


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.

Ticker: WLK

Company: Westlake Chemical Corp.

WLK 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 8/2/2011 Last 5 years

TEV / NTM Total Revenue Average 0.8x 0.7x 0.4x 0.7x 0.7x 1.0x 0.7x

High 0.9x 0.9x 0.5x 1.0x 1.0x 1.3x 1.3x

Low 0.6x 0.4x 0.4x 0.4x 0.5x 0.8x 0.4x

Close 0.7x 0.4x 0.5x 0.9x 1.0x 1.0x 1.0x

TEV / NTM EBITDA Average 4.3x 5.5x 6.5x 10.1x 6.6x 6.5x 7.1x

High 4.8x 6.7x 7.9x 16.4x 8.4x 8.3x 16.4x

Low 3.6x 4.0x 4.3x 5.9x 5.4x 5.1x 3.6x

Close 4.0x 5.1x 7.4x 8.3x 6.9x 5.7x 5.7x

TEV / NTM EBIT Average 5.1x 7.7x 11.5x 35.5x 11.0x 8.6x 15.2x

High 5.7x 9.6x 15.3x 249.7x 17.6x 10.9x 249.7x

Low 4.2x 4.7x 6.7x 11.3x 8.1x 6.6x 4.2x

Close 4.7x 7.9x 15.3x 17.3x 9.4x 7.5x 7.5x

Price / NTM EPS Average 8.4x 11.6x 15.0x 47.5x 19.1x 14.3x 19.4xHigh 10.4x 14.4x 40.9x 136.8x 30.5x 18.6x 136.8x

Low 6.9x 9.9x 9.7x 23.7x 12.2x 11.3x 6.9x

Close 10.1x 12.5x 40.9x 29.9x 14.7x 12.4x 12.4x

Source: Capit al IQ


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08/02/11

Westlake Chemical Corp.Materials

Commodity Chemicals

NYSE:WLK $48.97 $0.25 / 0.5% Stock price 48.97$

Shares outstandin 67

Market value 3,506

EPS EPS PE PEG Cash & equivalent 712

CY +1 estimate 4.42$ 11.1 1.6 Total debt 765

CY +2 estimate 4.48$ 10.9 1.6 Preferred equity - Debt / Capital 34.5%

Minority interest - Debt / Op Capital 37.1%

BPVM Adjusted = (15.8+9.6)/(2.8+1.0) 6.8 Other 76 Debt / EV 22.8%

Next 5yr EPS growth estimate 7.0% Enterprise Value 3,693 EV / Op Capital 162.9%

NYSE:WLK EBIT/ Cap

EBITDA/

Cap ROIC NYSE:WLK

Next 5 Qtrs

LTM

LTM

Trend

Qtr

Trend*

Next year estimate 18.6% 24.0% 20.6% Revenue growth (5) (2) 1

Next quarter estimate 23.0% 28.1% 24.8% Gross margin 1 8 (2)

Latest 23.7% 28.9% 24.6% SG&A & Other margin 3 (1) (3)Year ago 11.0% 17.2% 10.3% EBITDA margin (5) 11 (1)

9 qtr avg 13.1% 18.6% 9.3% EBIT margin (or EBT) (5) 8 (2)

Recurring Earnings (4) 8 (2)

Growth

Next yr, y/y estimate -19.1% -14.5% -17.0% NOPLAT (5) 2

Next Q, y/y estimate 67.1% 41.3% 90.5% EP (5) 2

Latest Q, y/y 116.0% 68.4% 137.7% Free Cash Flow (2) (1)

Last yr, y/y 130.5% 60.4% -294.5%

Lastest Q vs 9Q avg 80.3% 56.0% 164.8% LTM EBITDA/Capital (5) 8

ROIC 1 5

BPVM Ratio 6.8 Total (31) 48 (9)

Source: Capital IQ data and estimates, Asc endere Associates data and estimates. Percent of total possible -56% 34% -12%

Implied by Consensus Average

Westlake Chemical Cor Estima te Estima te Estima te Estima te Estima te

NYSE:WLK 9/29/12 6/29/12 3/30/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10

NOPLAT 500 497 498 519 548 534 386 280 273 216

Economic Charge 268 263 258 252 246 240 243 221 210 209

Economic Profit 232 233 239 267 302 294 143 59 63 6

Sequential growth 0% -3% -10% -11% 3% 106% 143% -7% 942% -108%

NOPLAT 500 497 498 519 548 534 386 280 273 216

Operating Capital 2,529 2,487 2,439 2,380 2,325 2,267 2,233 2,107 2,134 2,127

ROIC (NOPLAT / Operating 20.6% 20.9% 21.4% 22.9% 24.8% 24.6% 17.9% 13.3% 13.0% 10.3%

Sequential growth -2% -2% -7% -7% 1% 37% 35% 2% 26% 40%

# EBIT Forecasts 3 3 3 7 7

EBIAT Trailing 12 months 426 423 442 451 465 466 427 348 267 198

Depreciation 133 132 131 131 116 115 114 114 113 112

Capital Spending, recurring (329) (318) (275) (222) (169) (119) (95) (81) (86) (80)

Adjstd Working Capital Invest (8) (35) (75) (155) (198) (122) (73) (87) (68) (156)

Free cash flow to the entity 222 203 222 205 214 340 373 293 226 74

Source: Capital IQ data and estimates, Asc endere Associates data and estimates.


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DISCLOSURES

Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it

provides includes basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, the

firm manages stock portfolios for itself and clients. Ascendere currently sources financial data from Capital IQ.

Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's

portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "low-

quality" baskets should generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the high

quality basket are expected to outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A

more relevant benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion.

Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are

specific disclosures made by Ascendere:

1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering

the Companies and members of the analyst's immediate family have a financial interest in one or more of the Companies.

2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or

short any of the Companies.

3) Ascendere does not make a market in the securities of any of the Companies.

4) Ascendere has not received compensation from the Companies.

5) Ascendere has not managed or co-managed a public offering for any of the Companies.

6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board

member of any of the Companies.

7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class ofsecurities of any of the Companies.

DISCLAIMERS

This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or

related financial instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or particular

needs of any individual recipient. Investment decisions should be based on an individual's own goals, time horizon and tolerance for risk. The

information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are

subject to change at any time without notice and without obligation or notification. The officers, affiliates or family members of Ascendere

Associates may hold positions in the securities of the Companies. No warranty is made as to the accuracy of the information contained herein. The

views and opinions expressed in the market commentary reflect the opinions of the author and may be based upon information obtained from

third-party sources believed to be reliable but not guaranteed. These opinions are subject to change at any time based upon market or other

conditions. Ascendere disclaims any responsibility to update such views. This information is intended for the sole use of clients of Ascendere. Any

other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the risk of total loss. This isfor informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a

solicitation of an offer to buy or sell any securities or investment services. All information, opinions and estimates are current as of original

distribution by author and are subject to change at any time without notice. Any companies, securities and/or markets referenced are solely for

illustrative purposes. Past performance is not indicative of future performance, and no representation or warranty, express or implied, is made

regarding future performance. This report may contain

This report may contain forward-looking statements, which involve inherent risks and uncertainties, and we might not be able to achieve the

predictions, forecasts, projections and other outcomes we may describe or imply. A number of important factors could cause results to differ

materially from the plans, objectives, expectations, estimates and intentions we express in these forward-looking statements. We do not intend to

update these forward-looking statements.

For Investment Professional use only. NOT FOR FURTHER DISTRIBUTION. No part of this document may be reproduced in any way without the

prior written consent of Ascendere Associates LLC.

.


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DISCLOSURES

Ascendere is in the business of providing equity research and related consulting services to investors and their advisors.

The equity research it provides includes basic quantitative model portfolios and more detailed fundamental research

with respect to individual stocks. In addition, the firm manages stock portfolios for itself and clients. Ascendere

currently sources financial data from Capital IQ.

Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With

regard to Ascendere's portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unlessotherwise noted. Stocks in our "short" or "low-quality" baskets should generally be considered sells, unless otherwise

noted. While exceptions may occasionally occur, typically stocks in the high-quality basket are expected to outperform

the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant

benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2

billion.

Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its

own. The following are specific disclosures made by Ascendere:

1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research

analyst covering the Companies and members of the analyst's immediate family have a financial interest in one or more

of the Companies.

2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time

it may be long or short any of the Companies.

3) Ascendere does not make a market in the securities of any of the Companies.

4) Ascendere has not received compensation from the Companies.

5) Ascendere has not managed or co-managed a public offering for any of the Companies.

6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director oradvisory board member of any of the Companies.

7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of

any class of securities of any of the Companies.

8) The covering analyst certifies that this report accurately reflects such analyst's personal views.


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DISCLAIMERS

This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or

sell any securities or related financial instruments. The report is not intended to be in furtherance of the specific

investment objectives, financial situation, or particular needs of any individual recipient. The information contained

herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are

subject to change at any time without notice and without obligation or notification. The officers, affiliates or family

members of Ascendere Associates may hold positions in the securities of the Companies. No warranty is made as to the

accuracy of the information contained herein. This information is intended for the sole use of clients of Ascendere. Anyother use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including

the risk of total loss. For additional information on risks, disclosures, disclaimers and frequently asked questions, please

see the back of any monthly report or visit our website at www.ascenderellc.com.

Westlake Chemical -- Sell Off Based on Industry Peak Fears Premature

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