Profit from a lower price of oil
Lee Samaha : Axalta Coating Systems. The coatings company has an opportunity to benefit from falling oil prices in two main ways.
First, lower oil prices imply lower gasoline prices and that's likely to induce an increase in miles driven. As cars are driven more they are more likely to have accidents and that means an increase in demand for coatings in the auto-refinish market. For reference, Axalta has heavy exposure to the vehicle refinish market -- around 39% of its total sales.
Second, around 50% of Axalta's costs come from raw materials and around 65% of its purchased raw materials are derived from crude oil and natural gas. As such, lower oil prices can lead to higher gross margins for the company.
It's not a perfect inverse relationship, because customers ask for discounts when energy prices fall, and Axalta tries to pass on increased energy prices when oil prices rise.Nevertheless, a look at gross margins vs. the price of oil for two of Axalta's major competitors (with longer trading histories) shows how that lower price of oil does indeed tend to lead to higher gross margins -- good news for painting and coatings companies.
Data by YCharts
Outside of the vehicle refinish market (39% of sales), Axalta has significant exposure to light vehicle and commercial vehicle original equipment coatings (27% and 8% respectively) and demand should improve in 2021 as vehicle production recovers from the factory shutdowns in 2020. Meanwhile, Axalta's industrial coatings sales should also improve with better economic growth.
Everything points to a stronger 2021 for Axalta and analysts have sales growing 15% and EPS recovering to $1.52 from $0.81 in 2020. Ultimately, it means Axalta would trade on 16.2 times 2021 earnings. Throw in the company's excellent history of converting income into free cash flow, and some upside potential from a lower price of oil and Axalta looks a good value.
