RBC Says Axalta Coating Is 'Fit For Growth'; Starts At Outperform

• Axalta Coating Systems Ltd AXTA shares have declined 19 percent since trading above the $33 mark on July 15.
• RBC Capital Markets’ Arun Viswanathan initiated coverage of the company with an Outperform rating and a price target of $34.
• Management's vast experience in chemicals and consulting would enable the company to achieve its targeted cost saves by YE2017, Viswanathan said.

Despite generating industry-leading margins and facing company-specific growth opportunities, Axalta Coating’s shares are trading below the peer group average. Analyst Arun Viswanathan expects “continued strong execution” and high FCF generation to boost earnings as well as result in multiple expansion.

The company’s shares have declined more than 30 percent from their June high of $36. The pressure has been driven by market weakness and investor concerns on China Auto OEM.

Although about one-third of the company’s revenue is generated by Auto OEM, merely 7-10 percent of that comes from China. Almost 50 percent is from the Americas and 25-30 percent is Europe Auto OEM. In these regions, production and sales are ahead of expectations.

Moreover, Axalta Coating has 17 wins in China Auto OEM in 2014-15, and should continue to generate above-market growth in the country.

“At 42%, AXTA has the largest exposure to auto refinish coatings which is the highest EBIT margin coatings business at 25% + versus 10–20% for Architectural, Auto OEM, General Industrial coatings. As a result, AXTA has the highest overall EBIT margins in coatings, which we believe warrants a premium multiple,” Viswanathan wrote.

Axalta Coating is targeting $200 million in annual cost cuts by yearend 2017, and has achieved about $47 million so far. Viswanathan believes that the new management has the ability to achieve the cost trimming targets, given their “increased internal focus, strong background in chemicals and consulting, and cost-conscious board.”