It is time to update the thesis on Axalta Coating Systems (NYSE:AXTA). The previous update on the business goes back to 2017 when the company announced the acquisition of the North American industrial wood coating business of Valspar.
Trading at very demanding valuation multiples, shares have seen mediocre returns in the seven years that followed, although steady earnings growth resulted in earnings multiples having come down meaningfully over time.
With multiples down to a market multiple, appeal is increasing a lot, warming me up to the business and the shares. But I am cautiously waiting for dips to potentially get involved here.
On Axalta
Axalta is a business with a rich history, founded in 1866 as the producer of the original Standex paint. Having long been part of DuPont (DD), the business was sold to Carlyle in 2013, as the private equity owner brought the business public again as soon as 2014.
Shares were offered to the market at $19.50 per share and gradually rose to the $30 mark in 2017. This was based on a business which generated some $4 billion in sales, with Axalta at the time announcing a $420 million deal to acquire the Valspar assets, driven by the FTC verdict to Valspar to sell these activities as it was looking to be bought by Sherwin-Williams (SHW).
The purchase involved brands like Zenith, Lustre Lac and Graintone, combined generating some $225 million in sales with these coatings used in cabinets, floors and furniture, resulting in a 1.9 times sales multiple being paid for these activities which boosted pro forma sales by around 5%.
The company was comprised out of a $2.4 billion performance coating business which are generated from selling finishing solutions to body shops, complemented by a $1.7 billion transportation business. The company posted adjusted earnings at $1.10 per share, but GAAP earnings came in at just $0.17 per share. This made shares trading in the $30s look quite rich, given a highly adjusted earnings multiple.
Caution Saves The Day
Fast forwarding between 2017 and today, shares have seen very modest net capital gains. Having risen from $31 to highs around $36 here, shares have largely traded in a $20-$30 range. Note that investors have not seen any dividends in the meantime, indicating that return have been rather mediocre.
Forwarding between 2017 and today, the company has grown sales from about $4 billion to $5.2 billion. The company kept up margins nicely, as the company bought back nearly a tenth of the shares outstanding as well.
Forwarding to February of this year, the company posted 2023 sales up 6% to $5.18 billion, with GAAP earnings improving from $0.86 per share to $1.21 per share. The company posted adjusted earnings of $1.57 per share, up 9 cents on the year before, with the adjustment largely consisting out of amortization charges.
This marks modest growth from 2017, but shares still trade at 22-23 times adjusted earnings. This means that while the earnings have seen solid growth since 2017, the company has largely grown into a premium valuation here.
The company remains quite leveraged at 2.9 times, with adjusted EBITDA reported at $951 million for the year. The 221 million shares of the company grant it an $8.0 billion equity valuation at $36 per share, for a $10.8 billion enterprise valuation. This premium valuation was driven by a solid outlook for 2024, a year in which the company sees sales up in the low single digits, adjusted EBITDA at a midpoint of $1.03 billion, and adjusted earnings seen between $1.80-$1.95 per share.
As of now, the company has grown the performance coatings business to about two-thirds of sales (with offerings focused on refinish and industrial), complemented by a mobility coating business which focuses on light and commercial vehicles.
Steady Advancing
In May, the company announced a softer start to 2024, with first quarter sales up less than a percent to $1.3 billion. Adjusted earnings per share rose by thirteen cents to $0.48 per share, driven by a notable decrease in input costs, driving gross margins.
The company actually hiked the midpoint of the full-year EBITDA guidance to $1.065 billion, with adjusted earnings now seen between $1.90 and $2.00 per share. The improvement in margins are due to a focus on higher margin activities, as well as early benefits seen from the 2024 Transformation Initiative.
Net debt was rather steady at $2.8 billion, for a $10.8 billion enterprise valuation, implying that the overall business is valued at around 2 times sales, with EBITDA margins approaching the 20% mark here.
Halfway May, the company announced a $285 million cash deal to acquire The CoverFlexx Group from Transtar, with additional earn-outs coming in at $10 million based on the 2024 performance.
The company produces and sells coatings for automotive refinishing and aftermarket applications. With 120 employees, the sales contribution came in at $78 million, suggesting that a rich 3.7 times sales multiple has been paid, nearly twice the own sales multiple. The overall pro forma impact to the business is that it adds about 1.5% to pro forma sales.
Shares rallied from the lower $30s since the end of April, amidst a big beat in the first quarter results, as shares hardly reacted to the bolt-on deal which is relatively expensive, but then again is too small to alter the thesis. The reality is that the big beat from early this month is comforting, as there are concerns about economic performance, certainly in the key industrial and automotive markets.
What Now?
After shares of Axalta lagged for a long period of time, the observation is that underlying profits have improved a great deal. Right now, the company has seen a roughly 30 times earnings multiple in 2017 come down to a market multiple of about 18 times, while leverage is stable around 3 times and occasional M&A has been accompanied with modest organic growth.
In all, Axalta seems to have become a better business, and quite frankly, appeal is now more evident than it has been at many times in its past. Moreover, despite the modest growth, it remains a relatively small player in a consolidating industry, and while regulatory frameworks and regimes do not favor further consolidation now, Axalta itself has often been named as an acquisition target.
While the latest deal feels a bit rich and shares have run quite a bit higher in recent weeks, shares are definitely on my watch list in case of unexpected sell-offs.