Warren Buffett once said that if you buy enough quality companies below their intrinsic value, eventually, the portfolio over time should register a profit. We have consistently stated that there is safety in numbers in investing which basically means that the more diversified the portfolio (where position sizing is kept in check), the less risk that one or two poor positions can hurt you.
Westlake Chemical Corp. (WLK) is a stock we are eyeing up at present for a host of reasons. Firstly, the stock is well down from its 2018 highs where shares traded well over $100 a share. The contraction in the share price over the past few years has resulted in shares at present trading with a book value of 1.5 and a sales multiple of 1.1.
Furthermore, the long-term chart looks really attractive as shares look like they have finally put in a multi-year bottom. As the chart shows below, the monthly histogram looks like it is about to crossover which should coincide with a crossover of the MACD indicator.
When sizing up a potential value play, we always like to look at the financial condition of the company. When the balance sheet is researched carefully, we can more closely determine whether a company is a good investment or not in the stock market. Therefore, on that note, let’s see if there is some validity to the strong technicals we are seeing at present in Westlake.
In Westlake’s recent earnings report, its “cash and equivalents” increased to $1.43 billion (due to a $700+ million increase in long-term debt in Q3). This is the highest cash balance we have seen at Westlake for quite some time. Obviously, growing cash enables potential investment, dividend increases or share buybacks to name but a few.
Total receivables in Westlake’s recent report came in at $1.094 billion. Although receivables are tracking at a slightly higher clip than sales growth, they still only make up just over 13% of the company’s sales. Furthermore, the trend in inventories ($906 million in latest report) is encouraging in that they are not outpacing sales and are not that volatile. We do not like seeing a lot of volatility in this key line item as it can bring uncertainty to the potential investment.
These favourable trends (especially in cash and inventory) has resulted in the company’s current ratio increasing to 2.81 in the latest report. This is the highest level this number has been since 2016. The quick ratio which strips out inventory increased to 2.04 in the September quarter which is the highest level this number has been since 2015.
When we go to the “non-current assets section,” we can see that Net Property, Plant & Equipment hit $7.25 billion in the firm’s latest quarter. This key line item more than doubled in 2016 but since then, top line sales have been able to outperform it from a growth rate perspective. As investors, it is important to see some type of tangible results any time management invests money. Again, we like the underlying trend here.
Due to Westlake’s sizable acquisition back in 2016, intangibles and goodwill line items have increased. However, both of these line items still only make up under 14% of Westlake’s total amount of assets ($13.1 billion in the most recent quarter).
Long-term debt of $3.424 billion makes up the lion’s share of the firm’s total liabilities of $6.74 billion. Total amount of shareholders’ equity in Westlake’s recent quarter came in at $5.824 billion. Retained earnings hit $5.72 billion in Q3 which is encouraging given the firm pays out a dividend of $1.05 per share and also bought back $87 million worth of stock over the past four quarters.
Therefore, to sum up, the trends discussed above definitely give weight to the encouraging technicals we are seeing at present. The MACD indicator is a solid read on momentum and trend and its signals are extra significant on the long-term charts. Let’s see how the daily and weekly charts look at the end of this week to see if our buying pretense can be reinforced.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WLK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.