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Why You Should Add Element (ESI) Stock to Your Portfolio

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Element Solutions Inc. (ESI - Free Report) looks promising at the moment. It is benefiting from its cost-saving actions, growth through acquisitions, investments in strategic markets and strong end-market demand.

We are positive about the company’s prospects and believe that the time is right to add the stock to one’s portfolio, as it is poised to maintain the momentum.

Let’s take a look at the factors that make this Zacks Rank #2 (Buy) stock an attractive choice for investors right now.

Price Performance

Shares of Element have soared 121.9% over the past year against the 16.3% decline for the industry. It has also outperformed the S&P 500’s 38.8% rise over the same period.

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Upward Estimate Revisions

Earnings estimate revisions have the greatest impact on stock prices. Over the past two months, the Zacks Consensus Estimate for Element for the current year has increased around 15.1%. The consensus mark for 2022 has also been revised about 18% upward over the same timeframe.

Positive Earnings Surprise History

Element has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this period, it has delivered an earnings surprise of 15.6%, on average.

Attractive Valuation

Valuation looks attractive as Element’s shares are currently trading at a level that is lower than the industry average, suggesting that the stock has upside potential.

Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest, Tax, Depreciation and Amortization) multiple, which is often used to value chemical stocks, Element is currently trading at a trailing 12-month EV/EBITDA multiple of 12.89, cheaper compared with the industry's average of 30.13.

Superior Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholder funds. ROE for the trailing 12 months of Element is 12%, slightly above the industry’s level of 11.2%.

Upbeat Prospects

The company gained from strong demand in the broader electronics supply chain and accelerated demand across the industrial economy in the first quarter. It is seeing strong demand in its high-end electronics business.

A number of strategic initiatives are benefiting the company. Its reorganization has contributed to cost savings and it utilized its variable cost management measures in 2020 along with the resilience of its supply chain to generate organic profit and higher cash flows. The company is expected to maintain cost discipline in 2021 and this coupled with other strategic actions are likely to support margins and act as a tailwind for the year.

Also, acquisitions continue to be a catalyst for growth. The recently announced acquisition of H.K. Wentworth Limited will reinforce Element’s electronics portfolio. The first quarter of 2020 saw the company investing $6 million to acquire a new offshore fluid technology, which enables it to support its customers with the generation of sustainable capabilities. The acquisition of Kester in 2019 also added capabilities and scale to its existing electronics assembly materials business.

Moreover, the divestment of its Agricultural Solutions unit provided it a diversified business in terms of products, end-markets and geographies. The divestiture, completed on Jan 31, 2019, for net cash proceeds of $4.28 billion, provides the opportunity to invest in strategic markets, pursue measured mergers and acquisitions and deliver shareholder capital returns.

The company, in its first-quarter call, also increased its adjusted EPS guidance to at least $1.30, up from the prior view of $1.10-1.15. It also expects adjusted EBITDA in a band of $500-$510 million and anticipates generating a free cash flow of $285 million for 2021, up from $275 million expected earlier.

Other Stocks to Consider

Other top-ranked stocks in the basic materials space are Cabot Corporation (CBT - Free Report) , Olin Corporation (OLN - Free Report) and Tronox Holdings PLC (TROX - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cabot has a projected earnings growth rate of 125.9% for the current year. The company’s shares have risen 69.9% in a year.

Olin has a projected earnings growth rate of 506.7% for the current year. The company’s shares have soared 277.9% in a year.

Tronox has a projected earnings growth rate of 242.9% for the current year. The company’s shares have jumped a whopping 214.7% in a year.

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