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Does Elementis plc’s Profit Warning Suggest Croda International plc Is The Better Buy?

Shares of Elementis (LSE: ELM) have slumped by as much as 13% in early trading today, after the company warned that it expects full-year earnings per share to miss market expectations. 

A significant reduction in oil projects within North America was the reason given for the warning.

Sales of chemical additives used in oil sector projects are expected to be around 30% lower this year than the previous year. 

What’s more, Elementis’ personal care business is facing challenges in the Latin America market, where it has been impacted by local currency weaknesses. Further, demand in China for the group’s coatings additives weakened in the second quarter. 

However, personal care sales are running ahead of forecasts in other markets, which will help the division meet its targets for the year. 

Lowering expectations 

Before today’s warning, City analysts had been expecting Elementis to report earnings per share of 16.1p for 2015.  

And before today’s decline, these projections meant that the company was trading at a forward P/E of 19.5; a premium valuation that left little room for error. 

Unfortunately, analysts have not yet had time to factor today’s news into their earnings projections for Elementis. So, it’s impossible to place a value on the company at present. 

That said, Elementis does support a dividend yield of 4.2%, which appears safe for the time being — Elementis has a cash-rich balance sheet and remains cash generative. 

A better pick 

There’s no denying that Elementis has racked up an impressive performance during the past five years. Since 2010, the company’s shares have gained 332%, and earnings per share have jumped by 70%. 

Still, as today’s update shows, the company’s outlook is at the mercy of outside factors that it can’t control. Being a relatively small player in such a big market means that Elementis’ trading is bound to be volatile from time to time. 

On the other hand, Croda (LSE: CRDA) is one of the world’s largest speciality chemical producers and the group’s size gives it an enormous advantage. 

Outperforming

Croda’s shares have returned 642% since June 2005. Over the same period, Elementis has only notched up a gain of 443%. Elementis suffered during the financial crisis while Croda surged ahead.

That being said, Croda’s profit growth has lagged that of Elementis during the past five years. Croda’s earnings per share have only expanded 42% since 2010. 

But Croda has a defensive element to the business. The company’s life sciences or healthcare division is growing at a double-digit clip and is unlikely to be affected by global economic trends.

Croda’s healthcare sales increased by 15.8% during the first half of its financial year thanks to better-than-expected sales of its pharmaceutical grade Omega-3. Increased sales of high purity excipients (a substance that serves as a delivery medium for a drug) also helped boost sales. 

Not cheap

With its leading position in the chemicals industry, Croda isn’t cheap. The company currently trades at a forward P/E of 21 and supports a dividend yield of 2.5%.

Nevertheless, sometimes you have to pay a premium for quality. Croda’s steady growth and defensive nature are worth paying for. 

City analysts are forecasting earnings per share growth of 7% per annum is expected for the next two years. 

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Rupert Hargreaves has no position in any shares mentioned. 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.