Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Top Mid-Cap Stocks to Buy Right Now

By Lee Samaha - May 18, 2021 at 9:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Three diverse stocks for value investors to consider.

It's not easy to find great-value stocks in the market right now. Still, I think electrical products company nVent Electric ( NVT 4.47% ), specialty chemicals distributor Univar Solutions ( UNVR 3.74% ), and painting and coatings company Axalta Coating Solutions ( AXTA 2.37% ) are all excellent stocks for value-orientated investors. Here's why.

nVent Electric

The company is not a household name among investors, but that doesn't mean it's a bad investment. The case for buying the stock rests on its products' critical nature and its customers expanding their spending.

nVent is a leader in "connection and protection." The company operates out of three segments. The enclosures segment (around 48% of revenue) connects and protects electronics, communication, and power equipment. The second-largest segment is electrical and fastening solutions (28%) for electrical and mechanical systems. The third, thermal management (24%), provides electric thermal solutions for critical buildings and infrastructure.

A person working on an electrical junction box.

Image source: Getty Images.

As such, nVent plays on the increasing electrification of industry, buildings, infrastructure, and the energy industry; fortunately, it's an excellent megatrend to be in. If you are going to invest in renewable energy, you will need transmission, distribution, and storage. If you are a factory owner investing in automation, you will need more electrification. If you are determined to make buildings and infrastructure better run by becoming "smart" and connected, you will need more electrification -- data centers, 5G networks, power utilities, etc. The list goes on.

As such, Wall Street analysts have sales growing at a mid-single-digit rate after the initial double-digit growth bounce-back in revenue in 2021. Meanwhile, nVent is forecast to convert around 14% of its revenue into free cash flow (FCF). If you accept a mature industrial as being fairly valued at 20 times FCF, then nVent is undervalued.

NVT Price to Free Cash Flow Chart

Data by YCharts

All about self-help for Univar Solutions

The case for buying this specialty chemicals distributor stock depends on it successfully executing its so-called "S22" objectives for 2022. Specifically, management plans to cut its net debt-to-earnings before interest, taxation, depreciation, and amortization (EBITDA) ratio to below three times compared to 3.5 times at the end of 2020. Meanwhile, management is targeting a 9% adjusted EBITDA margin compared to 7.7% in 2020 while maximizing FCF generation.

Buy stock button on a keyboard

Image source: Getty Images.

Management aims to execute its ongoing plan to successfully integrate the $1.8 billion acquisition of Nexeo Solutions, made in 2019, as part of its strategic drive to focus on its core specialty chemicals distribution business. Alongside the Nexeo acquisition, management divested Nexeo's plastics distribution business in 2019. Similarly, Univar sold its environmental sciences business in 2019, its industrial spill business in 2020, and its own plastics distribution business in 2021.

Everything points to a company refocusing on its core competency, and Univar appears to be on target with its S22 plan. For example, management recently raised its 2021 adjusted EBITDA guidance to $680 million to $700 million from a previous range of $630 million to $650 million. Based on Wall Street revenue estimates, the updated guidance implies an 8% EBITDA margin for 2021, and management affirmed it was well on track for 9% by 2022.

Turning to valuation matters, CFO Nicholas Alexos said on the earnings call, "Excluding the final Nexeo integration expenses of the $70 million, our guidance would be in the range of the normalized free cash flow of $325 million to $375 million." If you take the midpoint of the normalized FCF range as underlying FCF, then Univar currently trades on less than 13 times ongoing FCF. That's too cheap for a company set to continue expanding revenue and margin until 2022.

Axalta Coating Systems

Axalta is one of those stocks that makes you wonder, why it is so cheap? On a price-to-FCF basis, the painting and coatings stock is very attractively priced.

AXTA Price to Free Cash Flow Chart

Data by YCharts

The reason for the low valuation probably comes down to its exposure to automotive production -- not a great market to be in in the last couple of years.

But here's the thing, or rather the three things. First, Axalta generates more revenue from the refinish market and industrial markets. It's more tied to the industrial economy, the number of vehicle miles driven, and the accident rate than automotive production.

Axalta estimated sales 2021

Data source: Axalta presentations. Chart by author.

Second, the performance coatings segment (refinish and industrial) tends to have a much higher margin than the mobility coatings segment (commercial and light vehicle). For example, in the recent first quarter, the performance segment generated a profit margin of 16.6% compared to just 11% for the mobility segment.

Finally, management expects all its end markets to embark on a nice bounce in growth from the lows of 2020.

Axalta Coating Systems End Market

Estimated Industry Net Sales Growth 2020-2024 CAGR

Refinish

9.5%

Light vehicle

11%

Commercial vehicle

10%

Industrial

14.5%

Data source: Axalta presentations. CAGR = compound annual growth rate. 

All told, Axalta's stock looks like it has plenty of upside potential as the economy recovers. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Axalta Coating Systems Ltd. Stock Quote
Axalta Coating Systems Ltd.
AXTA
$32.34 (2.37%) $0.75
Univar Solutions Inc. Stock Quote
Univar Solutions Inc.
UNVR
$28.31 (3.74%) $1.02
nVent Electric plc Stock Quote
nVent Electric plc
NVT
$37.87 (4.47%) $1.62

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.