Strategic Expansions And High-Value Investments Set To Boost Company’s Market Dominance

Key Takeaways

• Element Solutions' strategic focus on high-margin applications and cost efficiency is set to boost profitability and enhance earnings.
  
• Investments in emerging technologies like AI and expanded manufacturing capacity indicate strong potential for significant revenue growth and market share expansion.
  
• Reliance on specific sectors like EVs and smartphones, lack of customer diversification, and risks from currency fluctuations and acquisition strategies could impact profitability.

Catalysts

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

• Element Solutions' investments in high-value, high-margin applications and permanent cost actions are expected to continuously contribute to profitability, positively impacting net margins and earnings.
  
• The company's focused investments in new capabilities within the electronics portfolio to capitalize on emerging sources of demand, particularly from fast-growing markets like high-performance computing and AI, are poised to drive significant revenue growth.
  
• Improved customer intimacy from recent investments such as the ViaForm acquisition and customer excitement around Kuprion active copper applications development suggest accelerated commercial opportunities, likely improving revenue and market share in the semiconductor and circuitry solutions sectors.
  
• Plans to scale manufacturing capacity to meet commercial demands in key growth areas, including nanocopper technologies, indicate a strategic move toward enhancing revenue through increased production capabilities for high-demand products.
  
• Element Solutions' improving balance sheet and consideration for additional inorganic capital deployment aligned with its strategic goals suggest potential for further growth through acquisitions, potentially enhancing revenue streams and diversifying the product portfolio.

Assumptions

• Analysts are assuming Element Solutions's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $294.2 million (and earnings per share of $1.11) by about October 2027, up from $193.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.5x on those 2027 earnings, up from 32.1x today. This future PE is greater than the current PE for the US Chemicals industry at 26.4x.
• Analysts expect the number of shares outstanding to grow by 3.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Risks

• The reliance on particular market segments such as electric vehicles (EVs) and smartphones for growth could lead to revenue volatility due to sector-specific demand fluctuations, impacting the company's future sales and profitability.
  
• Diversification of the Power Electronics business from a few key OEMs is crucial; failure to sufficiently broaden the customer base could risk revenue concentration, potentially impacting the company's net margins if key customers' demand softens.
  
• Investments in new capabilities within the electronics portfolio, including strategic capacity expansion projects, carry execution risks that, if not managed, could lead to increased operational costs without proportional revenue growth, negatively affecting net margins.
  
• Exposure to foreign currency fluctuations, as noted by the negative impact of a strengthening U.S. dollar on net sales and adjusted EBITDA, poses a risk to earnings. Sudden adverse movements in exchange rates could impair future profitability.
  
• The company's strategy to increase inorganic growth through M&A activities involves risks related to the integration of acquisitions and the realization of expected synergies. Missteps here could negatively impact earnings and divert management's focus from core operations.
  

Valuation

• The analysts have a consensus price target of $31.29 for Element Solutions based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $294.2 million, and it would be trading on a PE ratio of 34.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $25.67, the analyst's price target of $31.29 is 18.0% 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.