Westlake Chemical began today at a 52 week high on the back of very strong earnings but has retreated with the market. Westlake has been one of our favorite ideas since founding C-MACC in part because we believe in the diversification strategy into building products and in part because the PVC market has not seen the same level of overinvestment as polyolefins globally over the last 3 years. Westlake’s view of the housing and construction market aligns with ours and by breaking out this segment of the business Westlake should see some valuation benefit from the more stable earnings that this segment should provide. Note that the focused building products companies trade at significantly higher multiples than chemicals. We expect Westlake to get earnings and multiple boosts from here.
Source: Westlake – 4Q21 Earnings Presentation, February 2022
Separately, the Element Solutions results are another confirmation of the very strong underlying industrial and manufacturing backdrop that we see globally today. Demand strength in every segment, but energy, was evident in the results, with energy likely to pick up as capital spending in the industry has risen in 1Q 2022. We continue to see very strong demand indicators as the remaining public companies report their fourth-quarter and those that have reported recently have confirmed that strong demand has continued through February. It is likely that some of the demand strength is related to inventories that might not be below recent historical levels (pre-COVID) but maybe below where they need to be in a more supply-chain constrained world. It is also possible that some of the demand is pre-buying against an expectation of higher, inflationary driven, prices. It has been decades since we saw a strong inflationary backdrop, and there are no good proxies for how much surplus buying we should expect to see, driven by a fear of higher prices later. For more see today's daily report.
Source: Element Solutions 4Q21 Earnings Call Presentation, February 2022