Axalta's Price And Cost Challenges May Just Be Getting Started

Citi Research downgraded Axalta Coating Systems Ltd (NYSE: AXTA) from Neutral to Sell Tuesday and decreased its price target for the stock from $29.68 to $25. Analysts P.J. Juverak and Daniel Jester think issues discussed in the company's pre-announcement, unfavorable price/cost gap and slower growth in several key end markets could continue into the fourth quarter and first half of 2018. The stock dropped around 3 percent Monday and there might be more room on the downside.

Higher costs of raw materials like propylene derivatives and TiO2 are pressuring margins, and the Citi Research analysts are forecasting approximately 90 bps of year-over-year EBITDA margin pressure in 1H 2018. Axalta gave price concessions to auto and industrial customers in 1H 2017 and now it has to increase prices, which could take two to three quarters.

The paint industry is suffering from slow organic growth, and Axalta is no exception. Its core growth has trailed that of PPG Industries, Inc. (NYSE: PPG) in three of the four past quarters. Some of the growth concerns were offset by Axalta's stable refinish business.

The Citi Research analysts lowered their 3Q and 4Q EBITDA estimate for Axalta to $211 million and $246 million respectively and they reduced their full-year 2018 EBITDA forecast by 7 percent to $948 million. They have also decided to decrease their valuation multiple for the stock from the current 11x 2018 EBITDA to 10.2x 2018 EBITDA, because of greater margin uncertainty.

Axalta could become a takeout target if Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.A), which already owns 9.6 percent of the company, decides to buy it. The potential takeover is the biggest risk to the analyst's call.

At time of publication, shares of Axalta were down 3.4 percent at $28.67.

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Image Credit: Axalta Coating Systems colored racing car By Marco Becerra - http://www.flickr.com/photos/mbecerra/8652938503/, CC BY 2.0, via Wikimedia Commons