In its larger electronic segment (63% of net sales), Element supplies specialty chemicals and materials for electronic hardware, from assembly to packaging.
While most consumers likely haven’t heard of Element and aren’t aware of its contributions to the products they use daily, the company plays an integral role in the supply chains for everything from mobiles phones to computers and even to cars and aerospace equipment.
For example, according to the company, each premium smartphone contains about $1.15 worth of its products. A 5G phone will contain about 15% above that (roughly $1.32).
As digitalization continues and technology evolves, the world will contain ever more digital devices and interconnectivity (e.g., 5G, Internet of Things), increasing the demand for chips along with the solutions and products that facilitate their manufacture.
Element’s Industrial & Specialties segment produces specialty chemicals that enhance surfaces and improve industrial processes. The company’s diverse end markets include aerospace, automotive, construction, consumer packaged goods, and oil and gas.
The specialty chemicals are designed to reduce the environmental footprint in these markets and foster energy efficiency, fitting into the macro global initiative to go green — and providing customers with the additional benefit of lowering their energy costs.
As the economy continues to rebound from Covid-19 — keeping in mind that Delta and other variants remain a threat — Element is enjoying strong tailwinds in electronics and certain automotive applications. These should gain further strength as 5G mobile devices begin to proliferate and as consumers increasingly adopt electric vehicles.
Things aren’t all roses. High raw material costs due to shortages ate into profits, with margins declining 1.5 percentage points compared to the first quarter. Element expects these cost pressures to persist into next year and has been stockpiling materials.
Still, as long as demand in its end markets remains strong, the ongoing shortages are not a huge problem. Looking ahead to the rest of the year, Element expects adjusted EBITDA to increase by roughly 20% compared to 2020 and adjusted EPS by about 40% to $1.35. It forecasts 10% growth in free cash flow.
In an unmistakable sign of a positive outlook and stability, in 2020’s fourth quarter Element initiated a dividend. Keep in mind that companies always want to avoid having to cut or suspend a dividend because it sends a really negative signal (the pandemic, of course, being a notable exception).
If corporate management has any doubts as to whether a dividend can be sustained, typically it wouldn’t initiate it in the first place and then risk having to cut it later on. So Element’s move is a good sign. The first quarterly dividend was $0.05 per share, and it was recently increased to $0.06.
With its broad portfolio of offerings, Element is poised to grow along with the end markets it serves. The stock has a price-to-book value of about 2.2 and an expected 2021 P/E ratio of about 16 based on the company’s guidance.
That’s not super-bargain territory, but it’s also not expensive. Nowadays, with the overall stock market near record territory, it’s difficult to find any quality company trading at bargain valuations.