- David Einhorn touted Solvay as one of his top five portfolio companies in a speech at the Thorne Conference.
- The Belgian chemical company has a high return on capital and stable profit margins, the hedge fund manager said.
- Einhorn said sell-side analysts who take a negative view of the company are overlooking a major source of revenue.
Value investing legend David Einhorn highlighted Belgian company Solvay in a presentation at the Thorne Conference, praising its market potential. Speaking later with CNBC, he said it was a top-five position in his portfolio.
“Solvay is a commodity chemical company with relatively high and stable margins, a high return on equity and a good return on equity,” Einhorn outlined on Wednesday. He added: “We think this boring essential chemicals business will generate attractive risk-adjusted returns for investors.”
The comments sent Solvay’s American Depositary Receipts soaring 18% to $3.22 apiece as of 2:45 p.m. ET.
The company primarily focuses on making soda ash, a common compound used to make everything from glass to soap to lithium batteries. Although soda ash is not a volatile commodity, 2024 will be a trough year as the coronavirus has reduced capacity utilization, Einhorn said.
He cited many sell-side analysts posting primarily negative reviews of the company due to Solvay’s association with soda ash. However, these reports largely ignore the fact that 70% of Solvay’s revenue stream comes from other chemical products such as peroxide, silica, and Cortis.
“What I am saying is that while soda ash prices and profits will decline in 2024 as everyone knows, the rest of the business will be less cyclical and more resilient. ” he said. “It seems like the bears are willing to completely ignore that reality.”
Additionally, the company is rated investment grade, with moderate leverage and a high return on capital, he said.
The consensus forecast is for earnings of 3.62 euros per share this year, but Einhorn said the stock should rise above 4 euros per share in 2024 as Europe’s economy recovers.
“Normal earnings per share should increase if management meets growth and cost targets.” [rise] That would be more than 6 euros per share.”
