Element Solutions Inc. (ESI): A Compelling Investment Opportunity According to Larry Robbins
Monday, Oct 7, 2024 2:40 am ET
2min read Element Solutions Inc. (ESI) has garnered significant attention from investors, including renowned hedge fund manager Larry Robbins. Robbins' bullish stance on ESI is rooted in the company's robust financial metrics, strategic focus, and strong market position. This article explores the key factors driving Robbins' investment thesis and highlights the potential of ESI as one of the best stocks to buy.
ESI specializes in specialty chemicals, with two main divisions: Electronics and Industrials/Specialty. The Electronics division contributes around two-thirds of profits, offering essential products 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.
Robbins' investment appeal is partly rooted in ESI's historical context and strategic pivot. Originally floated as a SPAC by financier Martin Franklin in 2013, the company was initially MacDermid and later became Platform Specialty Products. After a near-disastrous venture into crop protection chemicals, ESI refocused on electronics and surface materials in 2019. This strategic shift positions ESI as an attractive investment, given its previous struggles and current focused strategy.
ESI's low capital expenditure requirements and high free cash flow conversion rate play a significant role in Robbins' decision to invest. The company's EBITDA margins are in the low twenties, complemented by low capital expenditure requirements, around 2% of sales. This results in a high free cash flow conversion rate, indicating strong cash generation capabilities.
The opportunity is also driven by current cyclical trends in the semiconductor and broader electronics industries. Although these sectors faced significant downturns in 2023, 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. ESI 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, ESI'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, ESI 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 ESI's increasing electronics exposure, strong cash generation, and ongoing debt reduction efforts.
In conclusion, Element Solutions Inc. (ESI) presents a compelling investment opportunity according to Larry Robbins. Its focus on specialty chemicals in electronics and industrials, robust financial metrics, strategic focus, and strong market position make it an attractive choice for investors seeking exposure to the specialty chemicals sector. As the semiconductor and electronics industries recover, ESI's well-positioned strategy and strong cash generation capabilities could drive significant growth and value for shareholders.
ESI specializes in specialty chemicals, with two main divisions: Electronics and Industrials/Specialty. The Electronics division contributes around two-thirds of profits, offering essential products 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.
Robbins' investment appeal is partly rooted in ESI's historical context and strategic pivot. Originally floated as a SPAC by financier Martin Franklin in 2013, the company was initially MacDermid and later became Platform Specialty Products. After a near-disastrous venture into crop protection chemicals, ESI refocused on electronics and surface materials in 2019. This strategic shift positions ESI as an attractive investment, given its previous struggles and current focused strategy.
ESI's low capital expenditure requirements and high free cash flow conversion rate play a significant role in Robbins' decision to invest. The company's EBITDA margins are in the low twenties, complemented by low capital expenditure requirements, around 2% of sales. This results in a high free cash flow conversion rate, indicating strong cash generation capabilities.
The opportunity is also driven by current cyclical trends in the semiconductor and broader electronics industries. Although these sectors faced significant downturns in 2023, 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. ESI 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, ESI'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, ESI 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 ESI's increasing electronics exposure, strong cash generation, and ongoing debt reduction efforts.
In conclusion, Element Solutions Inc. (ESI) presents a compelling investment opportunity according to Larry Robbins. Its focus on specialty chemicals in electronics and industrials, robust financial metrics, strategic focus, and strong market position make it an attractive choice for investors seeking exposure to the specialty chemicals sector. As the semiconductor and electronics industries recover, ESI's well-positioned strategy and strong cash generation capabilities could drive significant growth and value for shareholders.
