In the last quarter, the company reported net income of $123.1 million or 94 cents per diluted share. Earnings beat the Zacks Consensus Estimate of 89 cents, providing a positive surprise of 5.62%. However, net sales of $975.2 million for the quarter lagged the Zacks Consensus Estimate, recording a negative surprise of 3.25%.
Westlake Chemical's performance deteriorated year over year due to lower sales price of all its major products. However, this was partially offset by higher sales volume. Net sales and income fell 11.6% and 15.9%, year over year, respectively.
Let's take a look at how things are shaping up for the forthcoming announcement.
Factors to Consider
The chemical and plastic producer ended first-quarter 2016 with a strong cash balance and expects capital expenditure of $500-$550 million in 2016 to be funded from the same. This includes the expansion of the Petro 1 ethylene unit in Lake Charles, LA, which started in the second quarter of 2016.
The company had announced the expansion of the Calvert City ethylene unit in January, which will lead to an additional 100 million pounds of annual ethylene capacity in the first half of 2017. The facility unexpectedly shut down on Jun 1 due to a mechanical failure of its ethylene unit, resulting in a complete outage. The complex is in the process of restarting. An impact of roughly $40 million will be experienced in the second and third quarters of 2016 due to this outage.
Additionally, the company entered into a definitive agreement with Axiall Corp. AXLL per which Westlake Chemical agreed to acquire Axiall. Westlake Chemical will purchase all of Axiall's outstanding shares for $33 per share, representing an enterprise value (including debt and specific liabilities), of roughly $3.8 billion. The deal is expected to conclude by fourth-quarter 2016. The acquisition is estimated to provide annual cost synergies of around $100 million.
For the current year, the company expects higher demand for its products as well as synergy benefits from past acquisitions. However, demand is heavily dependent on oil prices as it increases with a rise in the price. Demand for polyethylene improved toward the end of the first quarter with two price hikes, one in March and one in April, which is expected to benefit the second quarter. The price of PVC was also hiked twice during the same period as a result of strong demand.
However, second-quarter 2016 income from operations is expected to be impacted by loss of production and associated costs from the Petro 1 plant maintenance turnaround and expansion project. Another planned turnaround is expected to impact the Olefins segment by roughly $65 million. The company's third-quarter 2016 results are also likely to be affected by certain turnaround projects.
For the June-end quarter, the company appears to have put emphasis on capital expenditure. Although a recovery has begun, volatility in oil prices has significantly impacted the price of polyethylene globally as well as domestically in the last few months.
WESTLAKE CHEM Price and EPS Surprise
Our proven model does not conclusively show that Westlake Chemical is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:
Zacks ESP: Earnings ESP for Westlake Chemical is -6.32%. This is because the Most Accurate estimate is 89 cents, while the Zacks Consensus Estimate is pegged at 95 cents.
Zacks Rank: WestlakeChemical carries a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.
Stocks That Warrant a Look
Here are some companies in the same space you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Trinseo SA TSE has an Earnings ESP of +6.06% and a Zacks Rank #1.
Landec Corp. LNDC has an Earnings ESP of +6.67% and a Zacks Rank #3.
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