Element Solutions Forming Flat Base After Q2 Earnings

Element Solutions Inc. NYSE: ESI may be categorized as a specialty chemical maker, but that doesn’t tell you the full story of why it’s notched a year-to-date gain of 28.09 %. That outpaces the S&P 600 small-cap index’s year-to-date return of 16.23%.

ESI focuses on inputs for 5g smartphones, AI technologies, electric vehicles and other industrial and technological applications. As those examples show, the company works in niche markets with high growth potential. 

The success of its end users is great news for ESI, as the stock price advance illustrates. 

In addition to organic growth through ramped-up sales to in-demand industries, the company grew through a series of acquisitions in recent years. 

All of that is behind the company’s accelerating earnings and revenue growth in the past two quarters. Both grew at double-digit rates in the past three quarters. 

ESI reported its second-quarter on July 28, earning $0.35 per share, a 94% year-over-year gain. Revenue was $586.6 million, up 52%.

Analysts expect earnings to grow 55% in the current quarter, with revenue increasing 23% for the full year.

Easy Year-Over-Year Comparisons

In the earnings report, the company broke out sales by business unit. Electronics net sales grew 51%, while industrial sales were up 53%. 

In total net sales grew 52% over the second quarter of 2020, when the company felt the greatest impact of Covid shutdowns. It’s true that ESI, and many other companies, are looking good on fairly easy comparisons. 

Even so, ESI’s revenue gains, even when stripping out the effects of acquisition, looked strong. 

In the earnings release, CEO Benjamin Gliklich said, “Element Solutions had a terrific second quarter. We continued to execute against our growth strategy, driving strong organic performance and deploying capital prudently to compound earnings per share. This quarter was a record on the top-line — and included our first month with net sales in excess of $200 million — since we founded Element Solutions.”

He also added something that will sound familiar to investors who have been tacking recent earnings reports. 

“Our teams have been navigating supply chain constraints and raw material shortages attentively to meet the robust demand in our end-markets.,” he said.

Analysts peg earnings growth for the full year at 44%, to $1.38 per share. For 2022, Wall Street is eyeing an increase of 11%, to $1.53 per share.

This is the kind of stock that may go unnoticed, as the chemicals industry isn’t especially glamorous or one that many investors go out of their way to research. 

Piggybacking On Tech Leaders’ Gains

That is a mistake, as several chemical makers show strong chart action at this time. Many chemical companies are piggybacking on the success of higher-profile industries from the tech sector. 

That’s a well-established phenomenon. For example, in 2004, Apple NASDAQ: AAPL soared 201.36%as the iPod became a popular consumer product. (Seems like a very long time ago, doesn’t it?) 

Meanwhile, Apple suppliers Marvell Technology NASDAQ: MRVL and Synaptics NASDAQ: SYNA notched triple-digit price gains. 

ESI is showing some of the classic strengths of a solid growth stock. You should be looking for a prior run-up, which happened in this case. The stock’s one-year return is 115.12%. 

The current flat base began forming in mid-June and has corrected 11% in the past 10 weeks. Volume was mostly muted as the base formed, which is exactly what you want to see. It means there’s not a lot of selling pressure, as investors are essentially holding shares. It also means there’s not a lot of buying yet. 

At this point, a potential buy point would be above the prior high of $24.70 reached on June 11. The stock has repeatedly hit resistance between $23 and $24, showing you there’s no appetite among buyers to pay more at this time.