Axalta Coating: Cheap, Yet Impacted By Automotive Exposure

Axalta Coating Systems (AXTA) shares have declined to $31 due to concerns about the automotive sector, creating a compelling valuation of 12-13 times adjusted earnings. Despite a slight revenue decrease in Q1 and a revised full-year sales guidance, adjusted EBITDA and EPS increased, and the company maintains its full-year EBITDA and EPS guidance. While near-term challenges persist, the risk-reward profile has improved as leverage declines and the company continues share buybacks, though greater discipline in acquisition multiples may be warranted.

Analysis

Axalta Coating Systems (AXTA) presents a mixed but increasingly compelling valuation narrative. Despite its shares declining to $31, reflecting anxieties over its significant exposure to the automotive sector, the company has demonstrated robust earnings growth. For the full year 2023 (results reported February 2024), AXTA posted revenues of $5.28 billion, a modest increase of under 2% year-over-year from $5.18 billion in 2022, yet achieved a substantial 40% surge in adjusted earnings per share (EPS) to $2.35 from $1.57 in 2022, significantly outperforming its initial guidance range of $1.90-$2.00 for 2023. This earnings growth, coupled with a declining share price, has compressed the valuation to approximately 12-13 times projected 2024 adjusted earnings (midpoint $2.55), a stark contrast to its historical premium. Net debt stood at $2.8 billion at year-end 2023, with the leverage ratio improving to 2.5 times, primarily due to higher EBITDA, even as over $300 million was allocated to the CoverFlexx acquisition. However, a notable gap exists between the $2.35 adjusted EPS and the $1.79 GAAP EPS for 2023, with amortization charges explaining about half this difference and some other adjustments described as potentially dubious. First-quarter 2024 results showed a revenue dip of over 2% to $1.26 billion, impacted by a 3% currency headwind and generic volume declines, partially offset by pricing and CoverFlexx contributions. Despite this, Q1 2024 adjusted EBITDA rose by $11 million to $270 million, and adjusted EPS increased by $0.08 to $0.59. Following Q1, Axalta revised its full-year 2024 sales guidance downward to $5.300-$5.375 billion (from an initial $5.35-$5.40 billion), implying an underlying sales shortfall of roughly $100 million beyond revised currency impact assumptions, though it maintained its full-year 2024 EBITDA guidance and its adjusted EPS guidance centered at $2.55. Axalta continues its share repurchase program and benefits from declining leverage, but faces persistent headwinds from the automotive market and may need greater discipline concerning acquisition multiples.

Key Decisions for Investors

• Consider the current valuation of approximately 12-13 times projected 2024 adjusted earnings as potentially attractive, factoring in demonstrated earnings growth against automotive sector pressures.
• Closely monitor automotive production volumes and broader economic indicators impacting industrial demand, as these are key drivers for Axalta's organic growth and can influence the achievability of its maintained full-year EPS guidance despite the revised sales outlook.
• Scrutinize future M&A activity for disciplined capital allocation, particularly acquisition multiples, and assess the impact of ongoing share repurchases on shareholder returns, especially given the article's call for greater discipline.
• Maintain awareness of the adjustments contributing to the difference between GAAP and non-GAAP earnings to fully assess underlying profitability and cash flow generation, particularly the non-amortization related adjustments.