Buy FSI Stock Despite ‘Disappointing’ Q2 Earnings. Here’s Why.

Stocks to buy

Earlier this month, I gave readers the rundown on Flexible Solutions International (NYSEAMERICAN:FSI) stock, an under-the-radar “green wave” play.

With a low valuation, coupled with the company’s steady growth over the past few years, on the surface FSI stock appeared to be an opportunity worth exploring.

After diving into the details, more stood out, suggesting that shares in this maker of biodegradable polymers, as well as water evaporation products, had strong future growth prospects as well, even as it dealt with some near-term growth challenges.

Flash forward to now. The company just last week released its latest fiscal results. If you’ve checked them out already, you may start to question whether this stock really is “growth at a more than reasonable price,” or if it’s just a typical “value trap.”

My view, however, is that while dealing with some hiccups today, the story here really hasn’t changed. Here’s why.

FSI Stock and its Disappointing Q2 2023 Results

As discussed in my last FSI article, the company had already provided investors with preliminary revenue data back in July.

With this, it was not entirely surprising when Flexible Solutions reported a decline in both revenue and earnings, for the quarter ending June 30, 2023. During the period, revenue declined by 7%, from $11.2 million to $10.3 million.

Net income dropped by more than 51%, from $1.66 million to $809,865. Interestingly, instead of trying to sugarcoat the results, CEO Daniel B. O’Brien was quite candid, calling Q2 “disappointing” and saying Flexible Solutions had “predicted a rebound that did not occur.”

O’Brien also conceded that full-year results will likely be “flat to mildly down compared to 2022.”

This frank honesty, plus the fact investors were bracing for decline in the company’s top and bottom-line numbers, may explain why FSI stock has only experienced a moderate drop in price since they released these results Aug 14.

With O’Brien’s willingness to be forthcoming about the FSI’s current challenges, in turn the market appears willing to cut the company some slack, focusing more on future potential.

This includes potential with its main business, plus with a product line that has yet to really be monetized.

Why the Growth Story Remains

With the big drop in earnings last quarter, the sell-side has now walked back full year 2023 earnings per share forecasts for FSI stock. The full-year EPS forecast for the company has fallen from 40 cents to 35 cents per share.

This may represent a 37.5% decline compared to 2022 (when EPS came in at 56 cents per share), but it is perhaps safe to say this is already accounted for in the stock’s valuation.

At today’s prices ($2.70 per share), this stock remains in value territory, trading for only 7.7 times forward earnings.

Sure, if challenges persist, the aforementioned EPS figure could fall back. However, keep in mind that it’s factors like inflationary pressures driving these declines. As inflation cools, the company is expected to report stronger numbers overall starting next year (EPS forecast of 46 cents per share).

Besides a rebound in its primary business, Flexible’s “green wave” catalyst hasn’t gone away. Environmental and sustainability trends are favorable for FSI’s line of nitrogen conservation products.

Growing pressure for better water usage practices bodes very well for Flexible’s evaporation control products, which currently generate a small portion of overall sales.

A Possible Long-Term Buy After Recent Weakness

Last fall, then-strong results from Flexible Solutions resulted in a big run-up in its stock price, from under $2 to over $3 per share. Over the past month, with the poorly received earnings report, shares have coughed back some of these gains.

This latest pullback may frustrate current holders of FSI, but don’t view it as a reason to bail. As inflation cools, and macro uncertainties ease, the company could soon start getting back towards its past earnings high-water mark. This could lead to a big jump for the stock.

On a longer timeframe, Flexible’s “green wave” catalyst could drive an even more substantial level of growth. This should drive a massive surge in price for shares, both due to increased earnings and because of multiple expansion.

Following its recent weakness, consider FSI stock a long-term buy.

FSI stock earns a B rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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