The stock of Westlake Chemical Partners LP (NYSE:WLKP, 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 $26.99 per share and the market cap of $950 million, Westlake Chemical Partners LP stock shows every sign of being significantly overvalued. GF Value for Westlake Chemical Partners LP is shown in the chart below.
Because Westlake Chemical Partners LP 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 5.53% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Westlake Chemical Partners LP has a cash-to-debt ratio of 0.04, which ranks in the bottom 10% of the companies in Chemicals industry. Based on this, GuruFocus ranks Westlake Chemical Partners LP's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Westlake Chemical Partners LP 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 Partners LP has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $984.3 million and earnings of $1.82 a share. Its operating margin is 34.00%, which ranks better than 97% of the companies in Chemicals industry. Overall, the profitability of Westlake Chemical Partners LP is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Westlake Chemical Partners LP over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Westlake Chemical Partners LP's 3-year average revenue growth rate is worse than 89% of the companies in Chemicals industry. Westlake Chemical Partners LP's 3-year average EBITDA growth rate is -9.1%, which ranks worse than 77% of the companies in Chemicals industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Westlake Chemical Partners LP's ROIC is 25.48 while its WACC came in at 7.10. The historical ROIC vs WACC comparison of Westlake Chemical Partners LP is shown below:
In closing, the stock of Westlake Chemical Partners LP (NYSE:WLKP, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 77% of the companies in Chemicals industry. To learn more about Westlake Chemical Partners LP stock, you can check out its 30-year Financials here.
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