AXTA - Axalta Coating Systems: Resilient With Attractive Growth Potential

2023-03-21 03:32:08 ET

Summary

• Axalta maintains a growing top line, despite today’s challenging operating environment.
• Additionally, it maintains a strong global presence despite its cost-saving initiatives.
• It has also received prestigious awards for its innovative and environmentally-friendly products.
• The management is aiming for new opportunities in the paint accessories market.
• AXTA has improved its liquidity and has a stable outlook from Moody’s, making the stock an attractive buy.

Axalta Coating Systems (AXTA) is a global leader in high-performance coatings and specializes in producing liquid and powder coatings for various applications, such as automotive, commercial vehicles, industrial, and refinish markets. They have over 150 years of experience. Despite undergoing restructuring to optimize its operations, the company has maintained a strong global presence. The company's positive catalysts, such as a growing addressable market, make it attractive. Although Axalta has experienced some input cost volatility, it remains a resilient player in the industry and is attractively undervalued with its improving liquidity and deleveraging plans. Overall, Axalta is an attractive investment opportunity for those looking for a strong player in the coatings industry.

Overview: Unlocking New Possibilities

The company is known for its innovative and environmentally friendly products, in fact, they received a prestigious award for their innovative planet solutions. To navigate this challenging operating environment, AXTA underwent some restructuring to optimize its operations and streamline its business. In fact, AXTA has sold some of its facilities and cut jobs.

Despite this, they still have a strong global presence across 140 countries, with 45 manufacturing facilities (down from 47 in FY’21), allowing them to serve customers worldwide. Additionally, despite these trends, the company maintained its improving human resource count of 12,000, which is better than the pre-pandemic level.

Recently, the company has been concentrating on enhancing its product offerings, with a special focus on its recent acquisition of U-POL, a prominent player in the automotive coatings and accessories market. The management has displayed keen interest in further expanding the company's presence in this industry, with the objective of tapping into a massive $3.7 billion paint accessories market.

This strategic move is expected to boost the company's existing addressable market of $6.8 billion, thus allowing it to sustain its growth trajectory and retain its status as a significant player in the industry.

AXTA is in a favorable position to leverage its identified growth drivers, such as the increasing number of cars on the roads, major consolidation in the collision repair industry, and other secular trends such as planet sustainability. All these factors are set to increase industry activity in the foreseeable future.

AXTA's Impressive Growth in Mobility Coatings

AXTA has two reporting segments: Performance Coatings and Mobility Coatings. In the Performance Coatings segment, they offer top-notch liquid and powder coating solutions. Meanwhile, in the Mobility Coatings segment, they provide coating technologies for both light vehicles and commercial vehicle OEMs.

AXTA's annual revenue for 2022 was $4,884.4 million, representing a 10.6% increase over the previous year. However, this growth was somewhat tempered by a 4.9% headwind from foreign exchange. Despite this, the company's growth was driven by a 10.1% increase in average price-mix and a 3.7% increase in volumes, highlighting AXTA's successful revenue-boosting strategies.

Looking at its Performance Coatings segment on a quarterly basis, it recognized a total revenue of $819 million, up 1.8% from the same quarter last year, with significant growth in Refinish, as shown in the image below.

Despite correct grammar, when looking at its industrial performance, it showed negative growth due to lower volume driven by softer EMEA and North America regions. However, management remains optimistic about this, as quoted below.

Industrial volumes will be slightly down, but overall it's going to be very, a very similar buying picture. Source: Q4 2022 Earnings Call Transcript

Also, the Mobility Coatings segment has done very well, bringing in a total of $418 million in revenue. This represents an impressive 25.5% increase from its $333 million recorded in Q4’21, which can be attributed to the recovery of global auto production from the supply constraints experienced in the previous year. As illustrated in the image below, there are clear indications that global light vehicle builds are set to recover, which positions AXTA as an attractive investment opportunity.

Axalta's Resilience Amid Volatility

Despite facing current input cost volatility, Axalta Coating remains a resilient player in the industry. The company has managed to maintain its market position and continues to perform well. While the market may currently be bearish, there are encouraging signs that suggest a potential rebound for the company.

Although Axalta has experienced some price action weakness from its previous high of around $32, this should not cause undue concern. In fact, this volatility has led to the stock's current significant support level, making it a strong buy candidate. Examining the weekly chart of AXTA, we can see that it is currently sitting above its 200-day simple moving average ("SMA") support. This bullish indicator suggests that the stock is likely to continue on its upward trajectory.

However, it is important to note that Axalta's MACD indicator is about to cross under its signal line, which could indicate continued bearish sentiment. Therefore, it is crucial to closely monitor the market and be prepared for any potential downturns. A healthy consolidation at today's level will provide greater clarity regarding the market's direction. If today's level fails to hold, the next support level to watch for is around $25.

As with any investment, there are always risks and uncertainties. Input costs could continue to rise, which would put pressure on Axalta's bottom line. Additionally, economic conditions could change, leading to a market-wide downturn. Despite these risks, Axalta is well-positioned to navigate any challenges and emerge as a leader in the industry.

AXTA: Outperforming Peers, Improving Forward Multiples

Axalta's financial performance has been hindered by significant restructuring expenses and expenses related to mergers and acquisitions, which have had an adverse impact on its bottom line growth. As a cost-cutting measure, the company has decided to reduce its workforce, resulting in a termination expense of $23.9 million in FY'22. Unfortunately, this has negatively affected the company's GAAP earnings, which have inflated its GAAP P/E ratio. The situation is beginning to improve, as evidenced by the company's forward GAAP P/E ratio of 18.62x, which is currently undervalued in comparison to its 5-year average of 50.21x. This is an encouraging sign for investors, indicating that the company's future earnings potential may be underestimated by the market.

Additionally, not only does AXTA offer an attractive discount relative to its historical valuation, but it also remains a compelling option compared to its peers, as evidenced by the image below.

PPG Industries, Inc. ( PPG ), Sherwin-Williams Company ( SHW ), RPM International Inc. ( RPM )

After carefully examining the financials of AXTA, it is evident that the company's forward Non-GAAP P/E of 18.87x and GAAP P/E of 18.62x indicate that the stock is currently trading at a relatively attractive valuation. When compared to its peers' average Non-GAAP P/E of 20.58x and GAAP P/E of 21.82x, AXTA appears to be undervalued. Overall, this positions the company favorably among its peers.

This is especially true considering the company's forward EV/EBITDA ratio of 10.33x, which is significantly better than its five-year average of 11.68x. This indicates a positive trend in the company's valuation, making it an attractive investment opportunity.

The Inflated Input Cost Pressure

However, despite this strong top line report, AXTA has not been successful in controlling today’s inflationary pressure, as shown in the contracting margin as shown in the image below.

The company's gross margin has hit a record low of 29.05% this FY'22 due to the inflated input costs. If this trend persists, there is a risk of further deterioration in earnings per share in the future. Nonetheless, the management team remains optimistic that their cost-saving initiatives will help them manage the margin effectively. In fact, they have started to notice a more stable input cost, as quoted below.

This is especially important as we face areas of inflation in labor and energy costs, coupled with the carryover impacts of raws and freight costs that accelerated throughout 2022 before stabilizing in the fourth quarter. Source: Q4 2022 Earnings Call Transcript

Moreover, the company has been successful in reducing its fixed expenses through its structural savings plan. This is evident from the declining number of their owned 24 manufacturing facilities, as mentioned earlier. They also have $2.5 billion in variable costs that are waiting to stabilize in a normal operating environment setup, as quoted below.

Next to cost productivity, we have over $1.5 billion in fixed costs and another $2.5 billion in variable costs, including raw materials, freight, and energy. Given the large scale of spend and more than 46% of increases in variable costs over the past two years, we anticipate that we will drive cost enhancements to add considerable value to the bottom line. Another area of emphasis will be operational and supply chain excellence. I have spent most of my career in this area, ensuring safe and efficient operations for a global company. At Axalta, I see opportunity to increase capacity, deliver more reliable production, and ultimately drive near-term manufacturing efficiencies. Source: Q4 2022 Earnings Call Transcript

Stronger Liquidity and Deleveraging Plans

Additionally, AXTA remains attractive by lowering their debt level to $3,704 million, which improved their net leverage ratio to 3.8x, and helped the company gain a stable outlook from Moody's.

Furthermore, AXTA has successfully refinanced their term loans, extending the maturity dates to 2029. This has improved their liquidity and put them in a good position to navigate the current economic climate, which is experiencing temporary inflationary pressures. As a result, AXTA's stock is looking attractive.

The management is also optimistic about the future, as they anticipate that their cash flow will remain strong and that their balance sheet will continue to improve through deleveraging. Overall, these factors make AXTA stock an attractive prospect for investors.

Conclusive thoughts

In conclusion, AXTA stands out as a strong and adaptable player in the industry. In my opinion, the company is well-equipped to navigate the current economic climate and capitalize on emerging trends. The company is poised to continue on its growth trajectory. This makes Axalta an attractive buy candidate in today’s uncertain market.

Thank you for reading and good luck!

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