Element Solutions (ESI) Margin Compression Challenges Bullish Outlook Despite Strong Growth Forecast

Element Solutions (NYSE:ESI) posted a net profit margin of 9.6%, down from 11% last year, and delivered average annual earnings growth of 9.8% over the past five years, even though its most recent year saw negative earnings growth. Analysts expect ESI’s earnings to accelerate by 28.6% per year moving forward, far outpacing the forecasted 15.7% annual gain for the broader US market. Revenue growth is projected at 6.4% per year. With a share price of $26, below fair value estimates, and a strong growth outlook, the market is watching both the company’s profit potential and the pressures from recent margin compression.

See our full analysis for Element Solutions.

Now it is time to see how the numbers compare to the stories investors are telling. Let’s match the latest results against the prevailing narratives and see what holds up.

See what the community is saying about Element Solutions

Margin Expansion Forecast: 9.7% to 15.7% in Three Years

• Analysts expect profit margins to climb from today's 9.7% to 15.7% by 2028, a projected jump of 6 percentage points, despite the recent decline in reported margins compared to last year.
• According to the analysts’ consensus narrative, margin improvement is set to be driven by a mix of factors:
  • Commercialization of higher-margin products like active copper and new portfolio optimization should improve sales mix and recurring profitability.
  • Continued operational efficiency gains and investments in digitalization are anticipated to reduce operating costs. These efforts are expected to help fuel stronger net earnings growth that matches the ambitious margin guidance.
• Analysts' consensus view ties these expected margin conditions directly to near-term growth catalysts and cost management, suggesting the profit outlook is more robust than what recent results might imply.
  See what Wall Street is forecasting around these margin gains 📊 Read the full Element Solutions Consensus Narrative.

PE Ratio Stays High Versus Peers

• Element Solutions' price-to-earnings ratio of 26.2x currently matches the US chemicals industry average but remains roughly double its direct peer average of 12.9x. This underscores that the stock still trades at a significant premium to closer competitors even after share price declines.
• Analysts' consensus narrative points out two sides to this valuation:
  • Despite this high multiple, analysts believe sustained earnings quality and the expectation of robust profit growth can justify paying a premium relative to peers.
  • At the same time, this premium is only warranted if Element Solutions successfully delivers on margin expansion targets and accelerates growth as projected. Otherwise, downside risk could catch up to the valuation.

Analyst Price Target: 18.5% Upside From Here

• With the current share price at $26.00 and analysts targeting $30.80, Element Solutions is seen as offering about 18.5% upside from today’s levels, provided its future earnings trajectory holds.
• According to the consensus narrative, realizing this upside depends on several factors:
  • Revenue must grow to $2.8 billion and earnings to $438.6 million by 2028, with the PE ratio moderating to 19.9x, for the price target to materialize.
  • While valuation models point to a much higher DCF fair value of $45.53, the more conservative analyst target expresses confidence in growth but also reflects the balance between notable expansion catalysts and enduring competitive or macro risks.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for Element Solutions on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

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A great starting point for your Element Solutions research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

See What Else Is Out There

Element Solutions’ rich valuation means its premium is justified only if ambitious margin and earnings growth targets materialize, leaving little room for disappointment.

If you want to avoid the risk of paying too much for uncertain growth, check out these 849 undervalued stocks based on cash flows where you’ll find stocks trading at more attractive valuations right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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