Axalta Coating Systems Ltd (AXTA)

[Enterprising Investor]

Painting a Pretty Picture at Axalta (5/14/16)

Shares of the company, a leading manufacturer of auto paints, could rise by at least 25% over the next year.

By David Englander

While It is a relatively new public company, Axalta Coating Systems is no newcomer to car makers and body shops around the world. A producer of paints and coatings for cars and trucks, Axalta holds the No. 1 or 2 positions in most its global markets.

Axalta (ticker: AXTA) is the leader in automotive refinishing, a highly attractive business, which is less cyclical than selling coatings for newly built vehicles. Sales, here, depend on collisions and miles driven, not production rates.

Once a part of DuPont, where it was largely run to generate cash, Axalta was bought by the Carlyle Group three years ago, and was brought public in November 2014. Since then, the game plan, under CEO Charles Shaver, has been to reinvest for growth, and to improve efficiency and productivity.

The strategy has paid off. Out of the gate, the shares have surged 40%, to a recent $28. Yet there’s still plenty of opportunity for investors. By the end of 2017, RBC Capital Markets analyst Arun Viswanathan contends, Ebitda (earnings before interest, taxes, depreciation, and amortization) could run up 19%, as efficiency improvements shine through. Paying down debt, too, should help.

Axalta generates hefty free cash flow. Barriers to entry, particularly in the refinishing business, are steep. Analyst Viswanathan values the stock at a 10 times multiple of enterprise value to Ebitda, or $35 a share, about 25% above its recent level. His best upside case puts the stock at $37 in a year.

Axalta operates 38 plants, and sells to customers both directly and through over 4,000 distributors. Its brands are well-recognized in the auto industry, and include the likes of Standox, Cromax, and Spies Hecker. The Carlyle Group is still Axalta’s top shareholder, with a 29% stake. In time, it will exit, which should expand the shareholder base.

THE REFINISHING MARKET REPRESENTS the largest slice of revenue, at 43%. It’s a high-margin business, accounting for more than 50% of company profits. Axalta supplies paints and color-matching technology to body shops and has 25% of the global market. Another 40% of its sales come from supplying coatings for new cars, SUVs, heavy trucks, trains, and buses. The remaining profits come from selling coatings for various industrial uses, construction, car components, and electrical insulation.

This year, analysts look for earnings of $294 million, or $1.20 a share, on $4 billion in revenue. In 2017, profit is expected to jump 22%, to $1.47 a share, on 3% higher sales. Free cash flow per share could top $2 a share.

U.S. light-vehicle sales have kept up their furious pace, logging a 3.3% increase in April, to an annualized 17.3 million units. Still, some investors worry about the impact on Axalta whenever sales do decline. Those fears are probably overblown. New cars account for only about 11% of the company’s sales in the U.S., and a similar amount in Europe, where sales are expected to remain strong.

More importantly, Axalta’s refinishing business probably would still grow, even if new-car sales slumped. Market consolidation, especially in the U.S., is one driver. Axalta has a dominant share of larger body shops’ business, and should benefit as these players buy mom-and-pop operations.

Cheaper gas, too, is a positive, as it tends to lead to more collisions, a good thing for refinishing work. In the March quarter, refinishing sales rose 5.3%, before currency effects. On the April earnings call, CEO Shaver guided for 4% to 6% annual revenue growth, company-wide, in 2016, before currencies.

Axalta plans to take out $200 million in annual costs over three years, ending in 2017. Net debt is $3 billion, or 3.3 times expected Ebitda. That could fall to about 2.5 times in the next 18 months or so.
Axalta has attracted some notable value investors. Meryl Witmer of Eagle Capital Partners recommended the stock in Barron’s Roundtable in January, when it traded around $25. Berkshire Hathaway, a 9.8% holder, first bought its shares in April 2015 from the Carlyle Group in a private placement for $28.

With the stock still around the same level, investors can buy in at Warren Buffett’s price.

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http://www.barrons.com/articles/painting-a-pretty-picture-at-axalta-1463197491

Pre-publication closing price: $28.02