BMO upgrades this plastics manufacturer as Middle East conflict disrupts global supply

BMO Capital Markets believes that ramping Middle East tensions could boost Westlake’s pricing power. The bank upgraded the housing and construction supplies manufacturer to outperform from hold. Analyst Bhavesh Lodaya also raised his price target to $127 from $108, which points to upside of nearly 20%. Lodaya noted his previous reservations for Westlake, as well as the broad ethylene sector, included a shrinking ethane advantage and unfavorable polyethylene supply-demand dynamics. However, the recent Middle East conflict and the closure of the Strait of Hormuz has led to a significant amount of low-cost polyethylene capacity being taken out of commission, since the 15% of the world polyethylene capacity that comes from the region is offline or unable to be transported out. Polyethylene is a plastic used in plastic bags, bottles and other packaging. WLK 1Y mountain WLK 1Y chart “The temporary shuttering of 12-13% of the world’s PE supply owing to the Iran conflict significantly tightens global S/D,” the analyst wrote. “The S/D has gone from extremely loose at ~80% global utilization rates for 2026 to what looks to be low-90s%, driving pricing power.” Lodaya added: “This along with widening ethane advantage should drive strong earnings recovery in the PEM platform (helped by ongoing cost actions). This complements WLK’s significant operating leverage to an eventual recovery in U.S. housing. We believe all of this creates strong momentum for 2026/27 earnings and further strengthens WLK’s best-in-class balance sheet, providing additional avenues to grow shareholder value.” The analyst said that Westlake also has the advantage of producing most of its assets in the United States, therefore giving it the highest share of business tied to the U.S. ethane advantage versus peers. This means that it is also better hedged against potential headwinds in the Middle East and Europe, saving it from temporary margin pressures. Lodaya also expects Westlake’s balance sheet to strengthen further from here. “Assuming a higher working capital build vs. prior, we still see WLK’s Free Cash Flow higher at ~$280 million in 2026,” he wrote. “This financial stability and a manageable dividend (which has stood the test of time) provides WLK with strategic optionality that its highly-levered peers lack.” The stock has surged 44% this year but is now down 4% on the past 12 months.