AXTA Stock Study (8-21-24)

Posted by Mark on October 12, 2024 at 06:43 | Last modified: August 21, 2024 10:23

I recently did a stock study on Axalta Coating Systems Ltd. (AXTA) with a closing price of $34.33.

M* writes:

     > Axalta Coating Systems Ltd is a manufacturer, marketer and
     > distributor of high-performance coatings systems. It operates in
     > two segments. The Performance Coatings segment provides liquid
     > and powder coatings solutions to a fragmented and local customer
     > base. Its end markets include refinish and industrial. The Mobility
     > Coatings segment relates to the provision of coating technologies
     > to original equipment manufacturers of light and commercial
     > vehicles. The company operates in the geographic areas of North
     > America, EMEA countries, Asia-Pacific and Latin America.

Over the past 10 years, the medium-size company has grown sales and earnings at annualized rates of 1.6% and 27.3%, respectively. Lines are narrowing, somewhat up, and somewhat straight except for YOY sales declines in ’15, ’16, ’19, and ’20 along with EPS declines in ’16, ’17, ’20, and ’22. Ten- (Five-) year EPS R^2 is 0.66 (0.13), and Value Line gives an Earnings Predictability score of 40.

I think visual inspection just barely clears the barbed-wire fence. Sales growth is subbornly low while EPS—despite starting from a fractional base ($0.12 in ’14)—appears somewhat cyclical but certainly growing.

Over the past decade, PTPM trails peer and industry averages while increasing from 0.8% (’14) to 6.8% (’23) with a last-5-year mean of 6.1%. ROE also trails peer and industry averages despite increasing from 2.4% (’14) to 16.6% (’23) with a last-5-year mean of 15.6%. Debt-to-Capital is higher than peer and industry averages despite falling from 78.0% (’14) to 67.2% (’23) with a last-5-year mean of 71.7%.

Quick Ratio is 1.6 and Interest Coverage is 3.0 per M* who assigns a “Narrow” [quantitative] Economic Moat.

Value Line gives a B+ grade for Financial Strength and says the company is putting cash to good use:

     > Axalta closed the June quarter with $840 million in cash (up
     > from approximately $700 million at the end of 2023). The
     > company expanded its revolving credit facility to $800 million
     > in order to complete the CoverFlexx acquisition. The board
     > recently authorized a $700 million stock-repurchase program.
     > It may also use resources to refinance some of its debt.

With regard to sales growth:

• YF projects YOY 2.4% and 3.6% for ’24 and ’25, respectively (based on 17 analysts).
• Zacks projects YOY 2.2% and 4.1% for ’24 and ’25, respectively (5 analysts).
• Value Line projects 2.3% annualized growth from ’23-’28.
• CFRA provides ACE of 2.4% YOY and 3.0% per year for ’24 and ’23-’25, respectively (19).
• M* provides a 2-year ACE of 3.1% growth per year.

My 2.0% per year forecast is below the range.

With regard to EPS growth:

• MarketWatch projects 16.3% and 15.0% per year for ’23-’25 and ’23-’26, respectively (based on 21 analysts).
• Nasdaq.com projects 12.8% and 11.6% per year for ’24-’26 and ’24-’27 [ 6 / 4 / 1 analyst(s) for ’24 / ’26 / ’27 ].
• Seeking Alpha projects 4-year annualized growth of 18.7%.
• YF projects YOY 31.2% and 14.6% for ’24 and ’25, respectively (18), along with 5-year annualized growth of 19.6%.
• Zacks projects YOY 30.6% and 14.1% for ’24 and ’25, respectively (6), along with 5-year annualized growth of 20.6%.
• Value Line projects 13.7% annualized growth from ’23-’28.
• CFRA provides ACE of 71.1% YOY and 39.4% per year for ’24 and ’23-’25, respectively (19).

My 12.0% per year forecast is below the long-term-estimate range (mean of four: 18.2%). Initial value is ’23 EPS of $1.21/share rather than 2024 Q2 EPS of $1.35 (annualized).

My Forecast High P/E is 28.0. Over the past decade, high P/E falls from 229 (’14) to 28.5 (’23) with a last-5-year mean of 37.7 and a last-5-year-mean average P/E of 30.3. I am below the range.

My Forecast Low P/E is 20.0. Over the past decade, low P/E falls from 168 (’14) to 20.7 (’23) with a last-5-year mean of 22.8. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $24.20 is default based on initial value given above. This is 29.5% less than the previous closing price and 3.2% less than the 52-week low.

These inputs land AXTA in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 11.5%.

PAR (using Forecast Average—not High—P/E) of 8.2% is less than I seek from a medium-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I usually start by comparing my inputs with those of Member Sentiment. I will skip because only one other study has been done over the past 90 days.

Value Line is more aggressive than me with average annual P/E of 30.0 (24.0) and high EPS of $2.30/share ($2.13).

My LSPF exceeds the pseudo-rule-of-thumb 20% discount to previous closing price.

MOS is robust because my inputs are near/below respective analyst/historical ranges.

With regard to valuation, PEG is 0.8 and 1.9 per Zacks and my projected P/E, respectively: fairly valued on average. Relative Value [(current P/E) / 5-year-mean average P/E] is somewhat low at 0.84.

I am concerned that sales may eventually be a drag on EPS growth, but the former is not material to this analysis.

Per U/D, AXTA is a BUY under $33/share. BI TAR criterion is met ~ $30/share given a forecast high price ~ $60 (no dividend).

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