The share price of speciality chemicals manufacturer Elementis (LSE: ELM) is up nearly 4% today on the back of a strong Q3 trading update from the firm. And while a single quarter doesn’t mean much in the long term, I believe the company is one stock to own for many years to come.
The key for Elementis is a leading position in the science of rheology, which simply means control over viscosity and thickness. Without the speciality chemicals the company has expertise in, paint would have the consistency of water. This means its chemicals pop up in everything from homes to oil fields and ships’ hulls.
But where I see truly impressive long-term growth potential is for its output to be placed in more personal care/grooming products such as make-up. Earlier this year it spent $360m on its smaller rival SummitReheis that specialises in just such personal care applications. This immediately lent it significant scale and expertise in a part of the chemicals sector that is growing across the world and is also less cyclical than its traditional core oil & gas market.
This acquisition is already paying off with management mentioning “good revenue performance” in Q3 that was hopefully in line with the 24% sales growth posted in H1. There’s also strong potential for the company’s 16.2% adjusted operating margins to rise as recent investments begin to pay off and cost savings are found in the recently-acquired business.
With the oil & gas industry rebounding, long-term potential in its growing personal care business and plenty of scope to improve margins, I think Elementis could be a great growth stock at an attractive price of 18 times forward earnings.
Growing sales and margins
A second growth stock I like for the long term is quality assurance tester Intertek (LSE: ITRK). Through organic growth and bolt-on acquisitions the company has made itself into a globe-spanning organisation with over 1,000 offices in 100 countries. They provide companies with the assurance that their products and resources meet regulatory standards and perform as expected.
In the six months to August, the group’s revenue rose 2.7% in constant currency terms to £1,371m due to organic growth of 1.7% and the addition of some small acquisitions. This may not seem that impressive, but it truly is as revenue from the company’s resource division was down 12.3% in constant currency terms to £247m due to continued weakness in the commodities and oil & gas sectors.
Of course, cyclicality in these sectors is to be expected, which is why management is focusing growth on the more reliable products division that certifies everything from shoes to consumer electronics and pharmaceuticals. This division is already the group’s largest by revenue and profitability as its 20.5% adjusted operating margins are well ahead of the group average.
This will be the key market for Intertek going forward as it can grow ahead of global GDP through organic and acquisition-led methods and also has room to increase margins over time. With its share price up over 50% in the past year, it is not cheap at 27 times forward earnings, but with good sales and profit growth, I’d certainly consider buying its shares were they to pull back slightly.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Elementis and Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.