- By GF Value
The stock of Westlake Chemical (NYSE:WLK, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $105.12 per share and the market cap of $13.5 billion, Westlake Chemical stock shows every sign of being significantly overvalued. GF Value for Westlake Chemical is shown in the chart below.
Because Westlake Chemical is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 3.95% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Westlake Chemical has a cash-to-debt ratio of 0.35, which is worse than 70% of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of Westlake Chemical at 5 out of 10, which indicates that the financial strength of Westlake Chemical is fair. This is the debt and cash of Westlake Chemical over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Westlake Chemical has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $7.9 billion and earnings of $3.3 a share. Its operating margin is 8.51%, which ranks in the middle range of the companies in Chemicals industry. Overall, the profitability of Westlake Chemical is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Westlake Chemical over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Westlake Chemical is -1.9%, which ranks worse than 67% of the companies in Chemicals industry. The 3-year average EBITDA growth rate is -11.9%, which ranks worse than 81% of the companies in Chemicals industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Westlake Chemical's ROIC was 5.17, while its WACC came in at 9.09. The historical ROIC vs WACC comparison of Westlake Chemical is shown below:
In short, the stock of Westlake Chemical (NYSE:WLK, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 81% of the companies in Chemicals industry. To learn more about Westlake Chemical stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.