As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it’s possibly a deeply undervalued gem.
The Stock this week is:
Westlake Chemical Partners LP (WLKP)
Westlake Chemical Partners LP (NYSE: WLKP) is a master limited partnership formed by Westlake Corporation to operate and acquire ethylene production facilities. The company primarily derives revenue through long-term contracts with its parent company, Westlake Corporation, ensuring stable cash flows and minimized commodity price risk. Its key assets include ethylene production units and associated pipeline infrastructure, making it a crucial player in the chemicals sector.
A quick look at the share price history (below) over the past twelve months shows that the price is up 3.64%.
Source: Google Finance
One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let us simplify what it means:
IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:
The Calculation:
It adds up the stock’s ability to make money (Earning Power), grow (Incremental Growth), and pay back investors (Shareholder Yield). This gives you an idea of what the stock is really worth, called its Implied Value.
The Meaning of IV/P:
- If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal!
- If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.
What It’s Used For:
- It’s a quick way to spot undervalued stocks (good deals).
- If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced.
We currently have an IV/P of 2.40 for Westlake Chemical Partners LP, which means the stock’s Implied Value is calculated to be 2.4 times greater than its current price. In simpler terms:
For every $1 you invest, you’re potentially getting $2.40 of value.
This suggests that Westlake Chemical Partners LP may be undervalued, presenting an attractive opportunity for value investors.
Possible Reasons for This Undervaluation:
Economic Environment and Commodity Trends:
- The chemical industry is cyclical, and market sentiment can weigh on valuations, even for companies with stable cash flows like WLKP.
- While raw material prices fluctuate, WLKP benefits from cost-plus contracts that provide a hedge against commodity volatility.
Market Perception and Sentiment:
- Master limited partnerships (MLPs) sometimes trade at discounts due to concerns about distribution sustainability and regulatory risks.
- Investors may be underestimating WLKP’s consistent earnings and long-term contractual stability with its parent company.
Operational Performance:
- The company has consistently generated strong cash flows, enabling it to maintain an attractive distribution yield.
- Stable margins and long-term agreements mitigate risks tied to ethylene pricing fluctuations.
Dividend and Cash Flow Strength:
- WLKP offers a solid distribution yield, which is backed by predictable revenue streams.
- The company has maintained strong financial discipline, ensuring sustainability in payouts.
Conclusion:
With an IV/P of 2.40, Westlake Chemical Partners LP appears to be trading at an attractive valuation relative to its intrinsic value. The company’s strong fundamentals, stable earnings structure, and disciplined cash flow management make it a compelling stock for value investors seeking exposure to the chemicals sector. While certain market risks persist, the potential for upside remains significant if the market begins to recognize the company’s true value.
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