This is the final paper I submitted for the value investing class I took from Stanford that was taught by Kenneth Jeffrey Marshall. The assignment was that the paper be a recommendation to buy a certain listed equity at either the market price or some limit price. The analysis used the "Value Investing Model" created by Marshall. You can learn the most recent version of the model by reading Marshall's book Good Stocks Cheap (I highly recommend it).

1. Final Paper: Buy Recommendation
Westlake Chemical Corporation (NYSE: WLK)
BUS 123 W
Value Investing: An Introduction
Spring 2016
Presented by:
John Yannone
March 21, 2016

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3. I would buy Westlake Chemicals (Westlake) common stock (NYSE:
WLK) at current market prices because I understand the company; it’s
good; and at current market prices it’s inexpensive.
I found the company by applying the Value Investing Model to several
companies on a list I extracted from a custom screener using the American
Association of Individual Investors’ SI Pro software.
Westlake’s customers include some of the nation's largest producers of
film and flexible packaging, plastics fabricators, small construction
contractors, municipalities and supply warehouses.
Westlake is vertically integrated, incorporated in Delaware and
headquartered in Houston, TX. Majority of sales are to customers in
North America and Europe and this is where most manufacturing occurs.
Westlake is engaged in the cyclical plastics manufacturing and plastic
product industries. 2015 sales were almost split evenly between olefins
(primarily Low-Density Polyethylene or LDPE) and PVC products.
Westlake is the leading producer of LDPE in North America, second
largest manufacturer of PVC pipe in the US and a global market and
technical leader in specialty PVC. A steep decline in oil prices over the
past 1.5 years has lowered the cost for a variety of chemical products
including polyethylene and PVC.
In 2014 Westlake spun off, but still controls, Westlake Chemical Partners
LP to process natural gas liquids into ethylene, their primary raw material.
Westlake acquired specialty PVC resin business Vinnolit in 2014 and are
intelligently, amidst downturn in their industry, trying to acquire
competitor Axiall Corporation.
Westlake has performed good historically.
Westlake’s Return on Invested Capital (ROIC) normalized over 2006-
2015 ranged from 14.9% to 21.6%. Free Cash Flow (FCF) ROIC
(FCFROIC) normalized over same period ranged from 5.7% to 8.1%. If

4. I use a normalized maintenance Capital Expenditures (CAPEX) figure (a
couple $100M was mentioned on their latest conference call), FCFROIC
ranged from 8.2% to 12.5%. Westlake has good ROIC and FCFROIC
ranges compared to our target metrics of 15% and 8% respectively.
Growth in Operating Earnings (OE) per Fully Diluted Shares (/FDS) was
at a geometric mean rate of 43.5% from 2010 to 2014. Growth in Free
Cash Flow/FDS could not be calculated due to varying and high CAPEX.
Growth in Book Value (BV)/FDS and Growth in Tangible Book Value
(TBV)/FDS for 2009-2015 grew at geometric mean rates of 12.2% and
12.5% respectively amidst several acquisitions, which suggests they are
not overpaying for them. Three of our growth metrics are well above US
and global inflation rates.
Liabilities-to-Equity at year end 2015 was 71% and the 2006-2015
average was 83%, which shows the company has been funding
acquisitions without adding debt (2015 yearend Working Capital =
$1,653M).
Westlake looks like it promises to be good in the future.
Their customer base and supplier base are broad and unlikely to
consolidate. The 2015 annual report asserts “no single customer
accounted for more than 10% of sales” in each segment. I spoke with
John Brennan in Westlake’s Investor Relations Department and he
confirmed no supplier accounted for more than 10% of cost of goods sold.
Only 9% of US employees are unionized.
Porter’s 5 Forces applied to the company suggests a favorable competitive
landscape.
 Bargaining power of customers is weak since there are a limited
number of suppliers serving lots of customers, the product is an
important low cost ingredient for many and some require specific or
certified grades. There is low dependency on distributors.

5.  Bargaining power of suppliers is also weak. Most of their
feedstocks and other raw materials are commodities available from
many vendors and they have technology at most of their facilities
that allow feedstock diversity.
 Threat of substitutes is stronger due to large competitors in the
polyethylene segment. However, they use a better process
(Autoclave LDPE) than most competitors and can create more
specialty grades valued by some customers and could have
switching costs.
 Threat of new entrants is weak since high capital and technical
know-how are required, numerous environmental and safety
regulatory hurdles exist, and scale and integration are required to
compete effectively. US PVC resin suppliers consolidated from 22
suppliers in 1980 to 7 in 2010.
The company may have several sources of moat.
 Via vertical integration, location in US (low cost shale gas) and
ability to use ethane feedstock (most efficient feedstock for
producing ethylene and two US facilities connect to a feedstock hub
in Texas via pipelines they control), they are a low cost producer of
ethylene and PVC products. The cost-advantaged ethylene they
produce is the key raw material for all of their products.
 Their PVC pipe and building products are branded (North American
Pipe, North American Specialty Products and Westech Building
Products).
 They supply important ingredients to many customers and are the
US leader in LDPE (80% of their LDPE production is specialty
grade) and global leader in specialty PVC. As many of their
products are technical in nature, their internal sales force can help
sway customers to Westlake.

6. Market growth for polyethylene and PVC look good for decades to come
due to increasing US and world populations, urbanization and growing
global water infrastructure development.
The company is also shareholder friendly.
 Westlake has paid quarterly dividend payments for over a decade
and currently pays an annual dividend of $0.726/share (currently
yielding 1.5%).
 Between August 2011 and November 2015, Westlake’s Board of
Directors approved $500M in share repurchases (buybacks). As of
yearend 2015, they still have $238M remaining, which shows they
are showing some restraint.
 Albert Chao, President & CEO received total compensation of
$6.79M in 2014. The bulk of this was from performance based
incentive plans that seem shareholder friendly. The highest paid
non-management director earned total compensation of $213.5K in
2014.
 The 2015 Proxy Statement lists two related party transactions
totaling $15.9M. These seem fine and there is a Code of Conduct
that requires disclosure and approval of related party transactions.
At $48.35 per share and an Enterprise Value (EV) of $6,180M, Westlake
is inexpensive.
Using closing price of $48.35/share and current EV of $6,180M (YCharts
3/18/16), I calculated these valuation metrics: EV/OE 6.4, Market
Capitalization (MCAP)/OE 6.7, MCAP/FCF 10.9, MCAP/BV 2.0 and
MCAP/TBV 2.1. EV/OE and MCAP/OE are below our metrics of 7 and
8 respectively, and MCAP/BV is below our metric of 3. MCAP/TBV is
not a concern since it is very close to MCAP/BV.
A FCF based metric may not be the best choice for valuing Westlake due
to high CAPEX (muddied by growth). If we assume 2015 maintenance
CAPEX were only $250M, then MCAP/FCF drops down to 7.7.