We came across a bullish thesis on Element Solutions Inc (ESI) on ValueInvestorsClub by celtsfan86. In this article we will summarize the bulls’ thesis on ESI. Element Solutions Inc shares were trading at $27.69 when this thesis was published, vs. closing price of $24.9 as of Sept 10.
A laboratory technician pouring a specialty blend of industrial chemicals into a beaker.
Element Solutions Inc (ESI), a $6.5 billion market cap company with an $8 billion enterprise value, specializes in specialty chemicals with two main divisions: Electronics and Industrials/Specialty. The Electronics division, contributing around two-thirds of profits, offers Surface Mount Technologies (SMT), coatings, and interconnect products essential for manufacturing printed circuit boards (PCBs), smartphones, and semiconductors. The Industrials/Specialty division accounts for the remaining third, focusing on surface treatment chemistries and graphics solutions materials.
The company’s financial metrics are robust, with EBITDA margins in the low twenties. This is complemented by low capital expenditure requirements, around 2% of sales, resulting in a high free cash flow conversion rate. The electronics sector’s chemical requirements, including surface cleaning products, solders, and laminates, make these producers highly valuable. Despite their significance, many electronics-related chemical suppliers are either part of larger conglomerates or are highly valued by the market, reflecting their scarcity and importance.
Element’s investment appeal is partly rooted in its historical context. Initially floated as a SPAC by financier Martin Franklin in 2013, the company was originally MacDermid and later became Platform Specialty Products. After a near-disastrous venture into crop protection chemicals, Element refocused on electronics and surface materials in 2019. This pivot positions Element as an attractive investment, given its previous struggles and current focused strategy.
The opportunity is also driven by current cyclical trends. The semiconductor and broader electronics industries faced significant downturns in 2023, with reductions in sales and shipments. However, there are emerging signs of recovery. Semiconductor shipment data is improving, and industry players are observing early signs of demand revival. The electronics sector, including smartphone manufacturing, is also showing potential for a rebound, particularly with advancements in AI driving new handset cycles. Element is well-positioned in the electric vehicle (EV) and hybrid markets, with increased content requirements compared to internal combustion engines, which could drive further growth.
Valuation-wise, Element’s forward estimates are modest, with expected sales growth of around 4% this year and approximately 5% in the following two years. Historical guidance suggested 4-5% annual growth, with potential outperformance. If the industry recovery materializes, particularly in smartphones, Element could see substantial EBITDA growth. Despite the downturn, a partial recovery could enable EPS to exceed $2 by 2026, potentially pushing the stock price above $40 from its current $27. This represents a premium to historical valuations but is justified by Element’s increasing electronics exposure, strong cash generation, and ongoing debt reduction efforts.
Element Solutions Inc is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 42 hedge fund portfolios held ESI at the end of the second quarter which was 32 in the previous quarter. While we acknowledge the potential of ESI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as ESI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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