3 Wildly Undervalued Stocks to Buy for 2022

Paint and coatings company Axalta Coating Systems (AXTA +2.31%), electrical products company nVent Electric (NVT 1.25%), and specialty chemicals distributor Univar Solutions (UNVR +0.00%) aren't exactly household names, but that doesn't mean they can't be great investments. On the contrary, all three are attractively priced on commonly used metrics, and they have strong growth prospects in the coming years. Here's why.

Image source: Getty Images.

Undervalued stocks

First, the valuations on all three stocks are favorable. As a rough rule of thumb, an enterprise value (market cap plus net debt) or EV, to earnings before interest, taxation, depreciation, and amortization, or EBITDA, of around 11 times EBITDA is a decent value for a mature business growing at least in line with overall economic growth.

In addition, investors often look at free cash flow (FCF), or how much cash a company generates from earnings in a year, as a valuation metric. A price-to-FCF multiple of around 20 times FCF is a helpful benchmark, as it implies the company is generating 5% of its market cap in FCF. Companies can use FCF to pay dividends, reduce debt, or buy back stock.

As you can see below, based on Wall Street analyst consensus, all three are attractively priced based on a price-to-FCF multiple basis in 2022, and only nVent trades on an EV/EBITDA multiple above 11 in 2022.

Data source: marketscreener.com, author's analysis.

The numbers suggest significant upside for all three stocks, and their respective strategies and market positions suggest they have a good chance of hitting their earnings and FCF estimates.

Axalta Coating Systems

The paint and coatings company is heavily reliant on the vehicle markets. Around 38% of its revenue comes from the refinishing market, where Axalta supplies body shops and auto dealers with coatings ostensibly for cars damaged in collisions. Meanwhile, 26% of revenue goes to light vehicle original equipment manufacturers (OEM), and 8% to commercial vehicle OEM (trucks, buses, rail, light marine, aviation, etc.) manufacturers. The remaining 28% goes to the general industrial market.

The key to its 2022 will be three things that are likely to move in its favor. First, as the economy opens up and improves, more vehicle miles will be driven, leading to more collisions and therefore refinish volumes.

Second, leading automotive industry forecasters, such as IHSMarkit, expect that global light vehicle production will start to recover from the semiconductor shortage in 2022. IHS Markit expects light vehicle production to improve by just 1.2% in 2021 but then improve by 9% to 82.3 million units in 2022.

Third, all the paint and coatings companies got hit by supply chain disruptions and raw material price increases in 2021. However, history suggests those issues will diminish, and if they do, Axalta's profit margins are likely to rise.

nVent Electric 

The electrical connection and protection company is one of the few in the industrial sector to raise its full-year sales and earnings guidance on its third-quarter earnings presentation. It's a sign of the ongoing strength in the electrification investing theme. 

Whether it's electric vehicles, smart grids, renewable energy, energy storage, connected buildings, or smart infrastructure, and for a host of other reasons, investment in electrification will continue.

As nVent is the leading player in a highly fragmented market (protection and connection products), management plans to play a role in consolidating it through acquisitions. It's a good strategy in a growing market, and the company has years of growth ahead of it.

Image source: Getty Images.

Univar Solutions

Shareholders in this specialty chemicals distributor have watched their stock soar by nearly 40% in 2021, and there's possibly more to come in 2022. Management has been busy in recent years restructuring and refocusing the company on its core specialty-chemicals distribution market, intending to boost profit margins. Non-core businesses were sold, and cost reductions were implemented to streamline the company. Not all moves were defensive, though, management also made investments in digital technology to drive growth.

Fortunately, the supply chain disruptions in 2021 haven't waylaid the company's targets for 2022, and management has raised full-year earnings guidance every quarter this year. As such, Univar is on its way to achieving a run-rate EBITDA margin of 9% by the end of 2022.