Why I Would Sell Elementis plc And Buy Hill & Smith Holdings plc

Elementis plc (LON: ELM) is at the receiving end of low oil prices and a strengthening dollar, but defense play Hill & Smith Holdings plc (LON: HILS) will benefit from flood repairs in North England.

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Elementis (LSE: ELM) has a consensus price target of £265.41 by the analysts following it, but the company’s shares have recently been dealt heavy blows from both oil prices and the dollar, which is putting immense pressure on this target price. 

The largest US producer of chromic acid warned last week that a strong dollar will hurt its 2016 export potential, and that slowing oil prospecting in the US means it can sell less of its product, which is used in the oil extraction as well as in the personal care industry.

It won’t get any easier 

This situation won’t turn around any time soon, because oil is likely to remain a problem area, as is the US dollar. These are two very significant factors undermining the potential of this otherwise great company, which was originally part of the Harrisons & Crossfield commodities trading group.

It seems to me that Elementis will not recover any time soon, but might see marginal improvement in its share price, which hit a new 52-week low (£207.30) last Thursday (7th January), if the dollar happens to play in its favour. And that is a big if.

Massive export risks

A strengthening dollar is a more likely possibility in 2016, and with up to 40% of Elementis’ US output being earmarked for export, FX risks are considerable, as is testified by producers from Russia and Kazachstan already making inroads into Elementis’ markets.

In recent months, most analysts have revised downward their target price for the stock, as the company first warned of problems last June. It is easy to believe that these revisions reflect the problems already, but the market is telling us another story. At the current P/E of only around 9.8, the company might offer long-term potential; however, time is not on the side of Elementis — the longer these external factors impact the company, the less competitive it will ultimately become.

Hill & Smith Holdings

A better pick in my opinion is Hill & Smith Holdings (LSE: HILS). Recent developments in global stock markets combined with the floods in North England warrant a re-examination of this stock. The road building company, which manufactures and supplies infrastructure products for utilities and roads and offers galvanizing services, will benefit from the repair work that inevitably will emerge soon.

Flood repairs

Flood repairs are estimated to amount to £2.3 billion. Hill & Smith’s infrastructure products’ road segment is especially likely to benefit from this, as it is involved in supplying temporary and permanent safety products to customers involved in the construction or maintenance of national roads infrastructure.

UK to invest £80 billion in infrastructure 

This comes on top of the planned re-launch of the powerful Road Fund by Chancellor Osborne, who has said he will scrap green car subsidies and put this money into UK roads. Earlier this week, Reuters quoted analysts as saying that the amount of the UK’s total infrastructure investments up to 2020 is £80 billion.

Outperformer

Hill & Smith Holdings trades at a P/E of 29 and, even though this is high, it reflects a strong trading year in 2015 and sound fundamentals. There is little doubt to me that the company is on track to meet or surpass its full-year expectations. The industrials sector company has seen its share price rise by around 21% over the past year alone. I believe it is a solid defensive play as well as an excellent growth opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Angelique van Engelen owns shares in Elementis. The Motley Fool UK has recommended Elementis. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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