What's In Store For Westlake Chemical's (WLK) Q3 Earnings?

Westlake Chemical Corp. (NYSE:WLK) is set to report earnings for the third quarter of 2016 before the market opens on Nov 8.

In the last quarter, the company reported adjusted net income of $1.21 per diluted share. Earnings beat the Zacks Consensus Estimate of 95 cents, providing a positive surprise of 27.37%. Also, net sales of $1,086 million for the quarter surpassed the Zacks Consensus Estimate, recording a positive surprise of 5.08%. However, net sales fell 8.3% year over year.

Westlake Chemical’s performance deteriorated year over year due to lower production, unabsorbed fixed manufacturing costs as well as lower sales price of all its major products. This was partly offset by lower feedstock and energy costs as well as higher margins in Europe.

Let’s take a look at how things are shaping up for the forthcoming announcement.

Factors to Consider

Westlake Chemical completed the acquisition of Axiall Corp. in the third quarter. The company paid $33 per share in cash, representing an enterprise value, including debt and certain other liabilities, of $3.8 billion. The total pro forma revenues of the combined company are expected to be $7.4 billion, with an adjusted EBITDA of $1.4 billion for the 12-month period ended Jun 30, 2016. Westlake Chemical expects the transaction to provide annual cost synergies of roughly $100 million and be accretive to its earnings from the first year itself post closure of the deal. The company is also hopeful that the deal will help improve the financial as well as operational flexibility of the combined company and contribute to the current growth strategy. Management expects some transaction expenses related to the acquisition in the third quarter.

In the third quarter, Westlake Chemical also completed a new $1 billion unsecured revolving credit agreement. With a five year maturity, the agreement has replaced the old asset-based facility that was terminated. The conclusion of the agreement increases the company’s financial flexibility and proceeds from the same are expected to finance working capital and other general corporate requirements. Moreover, it also improves the company’s liquidity position to finance growth plans.

Westlake Chemical expects capital expenditures for 2016 to be lower than the previous guidance of $500–$550 million. This includes the expansion of the Petro 1 ethylene unit in Lake Charles, LA, which was completed in the second quarter. The expansion increased annual ethylene capacity by roughly 250 million pounds. It also includes early engineering work and the purchase of long lead items related to the expansion of the Calvert City ethylene unit that was announced in Jan 2016 and is scheduled for the first half of 2017.

However, income from operations in the third quarter is expected to be negatively impacted by lost production, unabsorbed fixed manufacturing costs and other costs related to the turnaround. Similar losses are also expected due to the unplanned outage at the Calvert City facility that was closed on Jun 1. The facility restarted operations on Jul 28. The two outages are expected to affect earnings by about $55 million in the quarter to be reported.

Westlake Chemical saw polyethylene prices increase in the first half of the year but now expects a decline in the second half. The company also continues to be negatively impacted by falling crude oil prices. Lower prices have resulted in reduced prices and margins, and this may continue.

Earnings Whispers

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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 90 cents. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Westlake Chemical carries a Zacks Rank #3, which coupled with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials 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:

The Andersons, Inc. (NASDAQ:ANDE) has an Earnings ESP of +9.09% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Versum Materials, Inc. (NYSE:VSM) has an Earnings ESP of +14.71% and a Zacks Rank #3.

Valvoline Inc. (NYSE:VVV) has an Earnings ESP of +3.13% and a Zacks Rank #3.

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