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Why Shares of Axalta Coating Crashed in February

By Lee Samaha - Updated Mar 5, 2020 at 8:41PM

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The paintings and coatings company is seen as particularly exposed to headwinds in the global economy right now.

What happened

Shares in paintings and coatings company Axalta Coating Systems (AXTA -2.24%) fell 13.5% in February, according to data provided by S&P Global Market Intelligence. Axalta's share price was already weak in 2020 due to concerns over its exposure to the industrial economy (specifically the auto industry). But the move down in February is correlated with the market fallout due to fears over the economic impact, or even a recession, caused by the COVID-19 coronavirus.

A man painting a car.

Image source: Getty Images.

As the chart below shows, all the leading paintings and coatings companies -- like Sherwin-Wiiliams, PPG Industries, and RPM International -- have taken a major hit as the market has declined. The reason: Their end-market revenue is tied to general economic activity -- although each company has its own specific end-market exposures.

AXTA Chart

AXTA data by YCharts.

So what

In the case of Axalta, the company generated 24% of its sales from the general industrial sector in the fourth quarter of 2019 and 34% from the original equipment manufacture of cars and trucks. There's no avoiding the fact that the industrial sector was already set for a weak quarter, but many were hoping that there would be a recovery in the second half of 2020. Meanwhile, because of COVID-19, the outlook has worsened for the already ailing light-vehicle and trucking market in 2020.

In other words, even if you were happy to buy into stocks like Axalta in the confidence of a second half recovery, you now have to deal with the elevated risk of a lasting impact from the coronavirus outbreak. In such circumstances, it's no surprise that the stock sold off, with some investors throwing in the towel.

Now what

As hard as it may be to stomach it, there is a bullish case for buying Axalta stock. The company still generates a large part of its revenue from relatively stable sources, like the auto refinish market. In addition, its forward P/E of around 12 times estimated earnings suggests there's a fair margin of safety.

As the coronavirus is ultimately brought under control, there's no reason the industrial economy can't improve later in the year. That would be good news for Axalta.

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Stocks Mentioned

Axalta Coating Systems Ltd. Stock Quote
Axalta Coating Systems Ltd.
$23.17 (-2.24%) $0.53
PPG Industries, Inc. Stock Quote
PPG Industries, Inc.
$117.21 (-1.73%) $-2.06
The Sherwin-Williams Company Stock Quote
The Sherwin-Williams Company
$225.41 (0.94%) $2.10
RPM International Inc. Stock Quote
RPM International Inc.
$78.96 (-0.50%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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