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AXTA - Axalta Coating Systems


dwk24
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I guess for starters, full apologies if there is already an Axalta board.  I did a quick search and didn't find anything.

 

I just read through management's presentation from a few months ago and the company looks fairly interesting.  Here are a few notes:

 

- Have a #1 or #2 position in each of their markets (Refinish, Industrial, Light Vehicle, Commercial Vehicle)

- Revenues are fairly diversified across each of these markets

- Revenues are fairly diversified across geographic markets (F/X hurting top line, currently)

- Coating costs are a very low % of total costs for their end markets (1% for new vehicle, 5% for refinishing)

- Expecting 9% growth in emerging markets, 37% of AXTA Rev is emerging markets

- In 2013, they began a cost reduction campaign to reduce $200MM in annual costs

- SG&A: 2013 $1,040M; 2014 $990M; 2015 est: $920M

- Adj. EBITDA for 2015 expected to be $860-900MM

- Net Leverage down to 4x from 5.6x at IPO

- Top Line growth going forward (excluding F/X) about 5%

- 2015 Total CapEx $150MM with 60% being 'growth & productivity' CapEx (Maintenance CapEx is well under $100MM)

 

12-13x EBITDA doesn't really scream buy, but going forward EBITDA will outpace revenue growth with the cost cutting initiatives (Management highlighted 13% EBITDA growth from 2012-2014).  Good chance EBITDA will be >$1B by 2017, with debt falling to <$3B.  Could be interesting if it slips back down into the $20s.

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I did a little work on the name about 6 months ago and below are some of the initial takeaways I had.

 

1) High-quality business and has been able to consistently push through price each year.

2) After-market piece of the business (refinishes) is ~40% of total revenue, ~40% is tied to OEM builds and the rest is for industrial uses. I would argue SAARs are above mid-cycle in the US and below in Europe, so maybe a wash.

3) Management has been able to take a ton of costs out of the business, largely driven by DuPont's inflated cost structure. Peltz used Axalta as an example of DuPont's waste. Future initiatives should provide a nice tailwind for EBITDA.

4) Unlikely to be any big acquisitions the Company will make - industry is very consolidated and PPG is #2 competitor

5) Long-term worry for me is that volumes in the refinishing business could potentially be in secular decline. Volumes are driven by miles driven and accident frequency. Lots of technology being put out in the market that is significantly bringing down number of accidents.

6) Some are bullish on the fact that oil is a big input cost for AXTA and they believe AXTA will be able to capture the margin from recent oil price declines.

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http://www.barrons.com/articles/barrons-2016-roundtable-part-3-12-stocks-that-could-outperform-1454131664

 

Witmer: The market has fallen sharply and quickly, creating some good opportunities for us. Axalta Coating Systems [AXTA] is one. It trades for $25 a share and has about 245 million shares outstanding, including options. The company manufactures specialty paints for cars, trucks, and industrial machinery. The management team, together with Carlyle Group, bought the business from DuPont [DD] at the beginning of 2013, and took it public in the fall of 2014 at $19.50 a share. Our investment thesis begins with management, which has done an exceptional job in continuing to build the company. DuPont milked it for cash, but Axalta’s chief executive, Charles Shaver, and chief financial officer, Robert Bryant, transformed the business by bringing in top talent, implementing accountability across the organization, and investing for growth.

 

Enlarge Image

 

Meryl Witmer: “Different things spur us to look at potential investments. One is the sale of a company by DuPont.” Photo: Jenna Bascom

How fast is Axalta growing?

 

Witmer: Ebitda has increased by more than 30% since 2012, to an estimated $865 million last year, even with flattish revenue due to currency head winds. Management has undertaken initiatives to add another $100 million to pretax earnings in the next two years. The crown jewel is the automotive-refinishing business, which is No. 1 globally with a 25% market share. Barriers to entry are large, given its distribution, scale, technology, and relationships with key customers. Axalta provides both the paint and color-matching technology, and works with body-shop owners to move vehicles through quickly. It helps the owner manage productivity and profitability.

 

The auto-refinishing industry is consolidating in the U.S., and Axalta is well positioned, with a 44% share of the market supplying the top multisystem operators. As these operators buy more body shops, Axalta gets more business. The refinishing business is driven by collisions, which tend to increase as more miles are driven and more cars are on the road. It is an annuity stream.

 

The light-vehicle paint business has a 19% global market share. Since the LBO, the company has invested in new plants in Germany and China to expand production. It has won more than 30 new contracts with barely a loss. The contracts will continue to drive revenue in 2016 and beyond.

 

What do you figure Axalta is worth?

 

Witmer: We assume modest top-line growth of 3% to 4%, with profit-margin expansion just from cost-savings initiatives. We also assume most of the free cash flow in coming years is used to pay down debt, which enhances the value of the equity. We see earnings per share increasing from $1 a share in 2015 to about $1.95 in 2018. In addition, Axalta has $309 million in noncash depreciation and amortization expense. Capital-spending needs are about $80 million a year. The difference amounts to 94 cents a share, which we add to earnings, to arrive at $2.85 a share in after-tax free cash flow in 2018. A business of this quality deserves at least a 14 multiple of free cash flow. We have a target price of about $40 in two years.

 

Schafer: We also own Axalta. It has one of the best management teams I have ever seen. The company’s success also speaks to the poor job done by DuPont.

 

Witmer: Different things spur us to look at potential investments. One is the sale of a company by DuPont.

 

Gabelli: Ouch! In this case, management bought it for a cheap price and flipped it as an initial public offering.

 

Witmer: Management made a good return on the IPO because they increased profitability dramatically, not because they loaded the company with debt.

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These are the stocks i found she has recomended before:

 

WYN

Psx

Hmhc

Gil

Gpk

Nvgs

Esl

Spb

Viab

 

She recommended psx long time ago, before Web start buying it. There's a video on youtube

 

Here's the video where she mentions PSX: http://www.cnbc.com/2013/09/19/stocks-dont-look-cheap-berkshire-director-meryl-witmer.html

Obviously has done very well since, even before Buffett started adding aggressively

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  • 9 months later...

Anyone see a real bull case for this company?

 

Latest guidance from q2 mentions 6% growth this year, and the margins seem to be under pressure both from increased input costs and competitive pricing.

 

There was a takeover offer last year from a Japanese firm which was rejected, is it a takeover target?

 

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Anyone see a real bull case for this company?

 

Latest guidance from q2 mentions 6% growth this year, and the margins seem to be under pressure both from increased input costs and competitive pricing.

 

There was a takeover offer last year from a Japanese firm which was rejected, is it a takeover target?

 

Yes, I believe the hope for a takeover is the main investment thesis here. High debt load and valuation is not exactly compelling st 12-13x EBITDA. Management is selling shares too.

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New CEO is 86'd today after some type of personal conduct investigation.  Interesting to me at these prices.  I still think this company gets sold.  Probably wants too high a price to make sense for Berkshire.  I purchased a starter position this morning.  We'll see how this develops

 

https://www.bloomberg.com/news/articles/2018-10-08/axalta-ceo-steps-down-for-conduct-inconsistent-with-policies

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How did these guys manage to borrow $6.8B and only pay $147M (Y2017) in interest rates? Their main loan carries a 3.75% interest rate, which I consider graciously low, considering that they are leveraged to the hilt, but how does this translate into just an apparent effective interest rate of 2.2%? I am clearly missing something, but can’t figure out quickly what it is.

 

FWIW, stock seems to be an hedge fund hotel.  Capex is very low (1/3 of depreciation) is this sustainable?

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How did these guys manage to borrow $6.8B and only pay $147M (Y2017) in interest rates? Their main loan carries a 3.75% interest rate, which I consider graciously low, considering that they are leveraged to the hilt, but how does this translate into just an apparent effective interest rate of 2.2%? I am clearly missing something, but can’t figure out quickly what it is.

 

FWIW, stock seems to be an hedge fund hotel.  Capex is very low (1/3 of depreciation) is this sustainable?

 

 

Not sure what $6.8 Billion you are talking about. Debt is around $3.9 billion as far as I can see.

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How did these guys manage to borrow $6.8B and only pay $147M (Y2017) in interest rates? Their main loan carries a 3.75% interest rate, which I consider graciously low, considering that they are leveraged to the hilt, but how does this translate into just an apparent effective interest rate of 2.2%? I am clearly missing something, but can’t figure out quickly what it is.

 

FWIW, stock seems to be an hedge fund hotel.  Capex is very low (1/3 of depreciation) is this sustainable?

 

 

 

 

Not sure what $6.8 Billion you are talking about. Debt is around $3.9 billion as far as I can see.

 

You are correct. I have no idea what SEC numbers I was looking at last night. Debt is ~$3.8B and they have roughly $700M in cash. $900M in EBITDA. Still not cheap, but this makes more sense.

 

FWIW, PPG just warned on earnings and stock looks like it will go down 10%. This does not bode well for AXTA. I probably would take a swag at PPG at $90 or lower.

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New CEO is 86'd today after some type of personal conduct investigation.  Interesting to me at these prices.  I still think this company gets sold.  Probably wants too high a price to make sense for Berkshire.  I purchased a starter position this morning.  We'll see how this develops

 

https://www.bloomberg.com/news/articles/2018-10-08/axalta-ceo-steps-down-for-conduct-inconsistent-with-policies

 

PPG spoked sector a little here. But that will give Axalta breathing room to increase prices too, if they haven’t already. If you look at PPG release their issues were very similar to what Axalta faced the last year or so. So that will be interesting to see if that occurs again...

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New CEO is 86'd today after some type of personal conduct investigation.  Interesting to me at these prices.  I still think this company gets sold.  Probably wants too high a price to make sense for Berkshire.  I purchased a starter position this morning.  We'll see how this develops

 

https://www.bloomberg.com/news/articles/2018-10-08/axalta-ceo-steps-down-for-conduct-inconsistent-with-policies

 

PPG spoked sector a little here. But that will give Axalta breathing room to increase prices too, if they haven’t already. If you look at PPG release their issues were very similar to what Axalta faced the last year or so. So that will be interesting to see if that occurs again...

I would think input costs are also rising?

 

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