Proceeds From Macdermid Sale Will Enable Future Investments

Key Takeaways

• Focus on emerging electronics niches, such as high-performance computing, could drive revenue through advanced packaging and high-reliability materials.
  
• Strategic reinvestment from asset sales and balance sheet deployment may lead to EPS growth through acquisitions, innovation, and share buybacks.
  
• Element Solutions faces revenue risks due to industrial weakness, currency volatility, reliance on emerging niches, tariffs, and geopolitical tensions.

Catalysts

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

• Element Solutions is focusing on penetrating fast-growing emerging niches in the electronics industry, such as high-performance computing and electric vehicles, which are expected to drive revenue growth due to increasing demand for advanced packaging solutions and high-reliability materials.
  
• The company has strengthened its relationships with key players in electronics markets and continues to focus on high-value niches, which could lead to improved net margins through more favorable product mix and price discipline.
  
• The expected closure of the Macdermid Graphics Solutions sale will provide significant proceeds, potentially enhancing earnings through reinvestment in higher-growth segments or share buybacks.
  
• Element Solutions aims to deploy its balance sheet capacity towards complementary tuck-in acquisitions and share repurchases, which may drive earnings per share (EPS) growth through strategic investments and capital allocation.
  
• Ongoing investments in innovation and new capabilities, such as ActiveCopper and other advanced technologies, are expected to support long-term revenue and margin expansion as these products are commercialized and scaled.

Element Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Element Solutions's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $307.1 million (and earnings per share of $1.27) by about April 2028, up from $242.6 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 30.6x on those 2028 earnings, up from 22.6x today. This future PE is greater than the current PE for the US Chemicals industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Element Solutions Future Earnings Per Share Growth

Risks

• Element Solutions faces headwinds in their industrial business due to low levels of activity in construction, heavy machinery, and Western automotive manufacturing, which could impact overall revenue and earnings if these conditions persist.
  
• Ongoing foreign exchange volatility, particularly a stronger U.S. dollar, poses risks to financial projections, potentially affecting earnings and margins through translation headwinds.
  
• The reliance on emerging, high-growth niches within the electronics industry may expose Element Solutions to risks if these niches underperform expectations, potentially impacting revenue and net margins.
  
• Exposure to tariffs and geopolitical tensions, particularly concerning China, poses a risk to demand and could adversely affect revenue in key markets.
  
• The guidance reflects uncertainty in global industrial production, suggesting potential downside risk to earnings if industrial markets weaken beyond expectations.

Valuation

• The analysts have a consensus price target of $31.12 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 $34.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $307.1 million, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 7.5%.
• Given the current share price of $22.57, the analyst price target of $31.12 is 27.5% 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.