AI And Power Electronics Will Drive Future Market Opportunities

Key Takeaways

• Strong demand in AI, advanced packaging, and data centers, along with Asian consumer electronics recovery, could lead to increased revenue growth.
  
• Investments in semiconductors and power electronics, plus strategic M&A, may enhance margins and long-term shareholder value.
  
• Macroeconomic volatility, supply chain weaknesses, and currency fluctuations may constrain revenue and margin growth despite mitigation efforts.

Catalysts

Operates as a specialty chemicals company in the United States, China, and internationally.

• Element Solutions is experiencing strong demand from fast-growing markets such as AI, advanced packaging, and data centers, in addition to a recovery in the Asian consumer electronics market. This could lead to increased revenue growth from these high-demand sectors.
  
• The company's electronics segment, particularly in leading-edge semiconductor and power electronics technologies, is leading in emerging categories. Continued investments in these areas may enhance net margins due to their higher value and growing importance.
  
• Expansion of product lines like wafer-level packaging and copper damascene, driven by robust demand for high-bandwidth memory applications, is expected to drive sales growth and potentially improve earnings due to increasing customer orders.
  
• The power electronics business is growing with new customer wins in the electric vehicle market in Asia and Europe, signaling future revenue expansion and potential margin improvement due to technology leadership in these rapidly growing markets.
  
• Element Solutions is leveraging its strong balance sheet to invest in strategic growth opportunities and potential M&A, which could boost long-term shareholder value and earnings growth through enhanced capabilities and expanded market presence.

Element Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Element Solutions's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $344.2 million (and earnings per share of $1.2) by about April 2028, up from $284.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2028 earnings, up from 17.2x today. This future PE is greater than the current PE for the US Chemicals industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Element Solutions Future Earnings Per Share Growth

Risks

• Ongoing macroeconomic volatility and trade uncertainties could impact business and consumer sentiment, potentially affecting revenue and earnings.
  
• Weakness in Western automotive and general industrial supply chains, as well as ongoing challenges in the Western smartphone market, may constrain revenue growth.
  
• Potential cost impacts from tariffs and trade actions, despite mitigation efforts through localization and pricing adjustments, could pressure net margins.
  
• Industrial and Specialty segment is experiencing cyclical weakness; continued softness or delayed recovery in industrial markets, especially in Europe, could hinder revenue and profit margins.
  
• Currency fluctuations have negatively impacted net sales and adjusted EBITDA; continued adverse currency movements could further affect earnings.

Valuation

• The analysts have a consensus price target of $27.167 for Element Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $344.2 million, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $20.24, the analyst price target of $27.17 is 25.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.