Axalta: Healthy Growth Masked By Currency Fluctuations

| About: Axalta Coating (AXTA)

Summary

Reported revenues excluding FX impact grew by 4.2%.

Latin America had an adverse FX effect on reported financials.

Axalta continues to be on track with stated long-term goals.

Axalta (NYSE:AXTA) reported earnings today for Q2 2016. While the results are healthy on a constant currency basis, foreign exchange translation effect more than ate into the reported revenues. However, it is important to note that majority of the adverse impact came from Latin America, which represents very small portion of the company's revenue. The following table shared by Axalta in its Q2 presentation sheds more light.

(Source: Axalta investor presentation)

It appears we may see this impact in the remainder of the year.

Click to enlarge

(Source: Axalta investor presentation)

Barring these FX impacts, Axalta seems to be making solid progress towards the goals set out by management in terms of productivity improvement, tuck-in acquisitions and balance sheet.

During the Investor Day last December, company management shared some long-term goals.

(i) Grow revenues to $6 billion+ by FY 2019

(ii) Reduce net debt-to-EBITDA leverage to at least 2.5x-3.0x

(iii) Achieve $200 million in productivity savings by FY 2017

Let's examine how Axalta is doing in terms of these goals.

Grow revenue to $6 billion+ by FY 2019

On a constant currency basis, Q2 sales were up by 4.2%, but were adversely impacted by FX translation, resulting in a decline in Net Sales by 2.7%. It is important to note that the sales growth came as a result of both volume growth and price increases, suggesting that the end markets that Axalta operates in are healthy.

At this pace of organic growth in revenue, Axalta will never be able to reach the goal of $6 billion+ in revenue by FY 2019 (i.e., a ~50% increase in 3 years). The company is pursuing acquisitions to grow revenue and at the same time add competencies and markets along the way. During the last quarter, Axalta did three tuck-in acquisitions that would add ~$100 million/year in revenue. It is likely that the company will pursue bigger deals once it reaches the target net debt-to-EBITDA leverage ratio,

Reduce net debt-to-EBITDA leverage to at least 2.5x-3.0x

Axalta management reported that during the quarter, the company paid down another $100 million in term loans, bringing the net debt-to-EBITDA leverage ratio to 3.3x. In another positive development, S&P upgraded Axalta's corporate credit rating by a notch from BB- to BB. This is long way from the investment grade that the company seeks, but an improvement nonetheless. It appears improving FCF is helping Axalta to pay down debt and pursue small tuck-in acquisitions at the same time.

Click to enlarge

(Source: Axalta Q2 2016 investor presentation)

Achieve $200 million in productivity savings by FY 2017

The company has embarked on two different productivity initiatives: "Fit-For-Growth (Europe)" and "The Axalta Way". Management plans to save $100 million through each of these initiatives, resulting in total run rate savings of $200 million. Axalta seems to be on track to achieve $60 million in additional productivity savings in FY 2016

Valuation

The company's Enterprise Value today is ~$9.9 billion, trading at ~11x projected EBITDA for 2016. This is not very expensive, but it's not very cheap either. If we take into account possible revenue growth next year and productivity improvements, we are looking at a 10x EV/FY17 EBITDA.

Conclusion

If you are looking to make a quick buck, this is not the stock for you. This is a long-term story. While there has been significant progress in the business (in constant currency terms), much of it was masked by the adverse impact of FX translation effects. It is nice to see Axalta is on track with its long-term value creation goals. We remain long for now.

Disclosure: I am/we are long AXTA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.