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What's in Store for Westlake Chemical's (WLK) Q1 Earnings?

Westlake Chemical Corp. WLK is set to release earnings for the first quarter of 2016 ahead of the bell on May 3. 
 
In the last quarter, the company reported net income of $111 million or 84 cents per diluted share. Earnings missed the Zacks Consensus Estimate of 94 cents, providing a negative surprise of 10.64%. Net sales of $986.8 million for the quarter also lagged the Zacks Consensus Estimate, recording a negative surprise of 8.36%. 
 
Westlake Chemical’s performance deteriorated year over year due to lower sales price of all major products sold by the company. However, this was partially offset by higher sales volume. Net sales and income fell 13.1% and 39.4%, 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 2015 with a strong cash balance, thereafter announcing its desire to undertake acquisition activities. The company expects capital expenditure of $475–$525 million in 2016, to be funded from its cash balance. This includes the expansion of the Petro 1 ethylene unit in Lake Charles, LA, scheduled to start in the second quarter of 2016. 
 
The company 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. Additionally, the company relentlessly pursued the takeover of Axiall Corporation in the first quarter, but its offer was rejected. 
 
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. Although the domestic market showed signs of recovery in the first quarter, European markets continue to remain down. Management expects the trend of low selling price for polyethylene until March to impact revenues in the quarter to be reported. Lower price of PVC may also impact the top line in the first quarter. 
 
For the March-end quarter, the company appears to have put emphasis on capital expenditure. Volatility in oil prices has significantly impacted the price of polyethylene globally as well as domestically in the last few months. The quarter was expected to remain slow and the markets are due to pick up later in the year.
 
Earnings Whispers 
 
Our proven model does not conclusively show that Westlake Chemical is likely to beat earnings 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. Unfortunately, as elaborated below, it is not the case with Westlake Chemical. 
 
Zacks ESP: Earnings ESP for Westlake Chemical is +1.12% as the Most Accurate Estimate is 90 cents and the Zacks Consensus Estimate is 89 cents.  
 
Zacks Rank: Westlake Chemical carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #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 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:
 
The Scotts Miracle-Gro Company SMG has an Earnings ESP of +1.12% and a Zacks Rank #2. 
 
Orion Engineered Carbons SA OEC has an Earnings ESP of +13.79% and a Zacks Rank #3.
 
Albemarle Corporation ALB has an Earnings ESP of +1.18% and a Zacks Rank #3.
 
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ALBEMARLE CORP (ALB): Free Stock Analysis Report
 
ORION ENGINRD (OEC): Free Stock Analysis Report
 
WESTLAKE CHEM (WLK): Free Stock Analysis Report
 
SCOTTS MIRCL-GR (SMG): Free Stock Analysis Report
 
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