Element Solutions Stock Is Estimated To Be Significantly Overvalued

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GF Value
Apr 07, 2021
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The stock of Element Solutions (NYSE:ESI, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $18.79 per share and the market cap of $4.6 billion, Element Solutions stock shows every sign of being significantly overvalued. GF Value for Element Solutions is shown in the chart below.

Element Solutions GF Value Chart

Because Element Solutions is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.2% over the past three years and is estimated to grow 2.77% annually over the next three to five years.

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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Element Solutions has a cash-to-debt ratio of 0.19, which which ranks worse than 82% of the companies in Chemicals industry. The overall financial strength of Element Solutions is 4 out of 10, which indicates that the financial strength of Element Solutions is poor. This is the debt and cash of Element Solutions over the past years:

debt and cash

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Element Solutions has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $1.9 billion and earnings of $0.31 a share. Its operating margin is 12.55%, which ranks better than 70% of the companies in Chemicals industry. Overall, the profitability of Element Solutions is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Element Solutions over the past years:

Revnue and Net Income

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Element Solutions is 4.2%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 14.6%, which ranks better than 71% of the companies in Chemicals industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Element Solutions's return on invested capital is 5.71, and its cost of capital is 8.69. The historical ROIC vs WACC comparison of Element Solutions is shown below:


To conclude, the stock of Element Solutions (NYSE:ESI, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 71% of the companies in Chemicals industry. To learn more about Element Solutions stock, you can check out its 30-year Financials here.

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