AXALTA COATING SYSTEMS LTD (NYSE:AXTA): A Prime Example of Value Investing in Action

Value investing focuses on finding stocks priced below their true worth, giving investors a safety net. This approach, introduced by Benjamin Graham and improved by Warren Buffett, highlights financial stability, earnings potential, and steady growth—traits that lower risk while creating room for gains. A "Decent Value" screen picks stocks with good valuation scores (7 or above on ChartMill’s Valuation Rating) while also showing solid earnings, financial stability, and growth. These rules help steer clear of stocks that seem inexpensive but lack strong fundamentals.

Axalta Coating Systems Ltd (NYSE:AXTA) stands out as a stock that fits this model. The company, a worldwide producer of coatings for automotive and industrial sectors, shows both low pricing and reliable fundamentals. Here, we explain why AXTA matches the principles of value investing.

Valuation: The Heart of Value Investing

The main idea of value investing is purchasing stocks below their true worth. AXTA’s Valuation Rating of 7/10 points to its appealing price compared to earnings and cash flow:

• Price/Earnings (P/E) Ratio: At 12.57, AXTA is priced lower than the industry average (32.51) and the S&P 500 (26.87). This implies the market underestimates its earnings capability.
• Price/Forward Earnings: A ratio of 10.77 suggests more upside, with AXTA being less expensive than 76% of its peers in the chemical industry.
• Enterprise Value/EBITDA: A lower multiple than competitors indicates the stock isn’t overpriced relative to operating cash flow.

These numbers fit Graham’s focus on buying stocks with a safety margin—AXTA’s valuation allows for potential gains if the market adjusts.

Profitability: Reliable Earnings Strength

A high Profitability Rating (8/10) highlights AXTA’s ability to produce returns:

• Return on Equity (ROE): At 19.69%, AXTA does better than 89% of its peers, showing efficient use of shareholder funds.
• Operating Margin: 15.66% reflects good cost management, beating 79% of competitors.
• Consistent Performance: Positive operating cash flow and earnings over the past five years point to durability.

For value investors, profitability means the company can grow earnings over time, reducing dependence on unpredictable price changes.

Financial Health: Managing Debt and Liquidity

AXTA’s Health Rating (5/10) indicates reasonable strength, with some areas to watch:

• Liquidity: A Current Ratio of 2.12 and Quick Ratio of 1.53 show enough short-term asset coverage.
• Debt Concerns: A Debt/Equity ratio of 1.50 is elevated, but manageable given its cash flow. The Altman-Z score (2.32) suggests low near-term bankruptcy risk.

While not perfect, AXTA’s financial health is acceptable for a value pick—especially when paired with strong profitability.

Growth: Steady but Improving

With a Growth Rating of 4/10, AXTA isn’t a rapid-growth stock, but it displays positive signs:

• EPS Growth: Up 25.39% YoY, with analysts predicting 10.63% annual growth ahead.
• Revenue Challenges: A small drop (-1.01% YoY) is balanced by a 3.31% long-term CAGR.

Value investors favor stability over fast growth, and AXTA’s rising earnings fit this preference.

Conclusion

AXTA’s mix of low pricing, high profitability, and manageable debt makes it an interesting choice for value-focused portfolios. Its coatings business—serving cyclical but vital industries—provides steady demand, while margin improvements and share buybacks (mentioned in the report) could further increase its worth.

For investors looking for similar opportunities, the Decent Value Stocks screen offers a selected list of stocks meeting these standards.

Disclaimer: This analysis is not investment advice. Do your own research or consult a financial advisor before making decisions.