Ben Claremon of Cove Street Capital presented his in-depth investment thesis on Axalta Coating Systems (US: AXTA) at Best Ideas 2019.

Thesis summary:

Axalta is a leading manufacturer and distributor of performance coatings, mainly serving automotive, commercial vehicle and industrial end markets. The company was once part of DuPont but was sold in 2013 to Carlyle Group, who then took the company public in late 2014.

After a few years of restructuring and consistent operational improvement, Axalta has become a high-margin, high-return, FCF-generating company whose stock has been under pressure due to a number of issues that Ben believes to be transitory in nature. Axalta’s end markets are most certainly impacted by short-term issues such as the cyclicality in auto manufacturing and downturns within emerging market economies. Over the long term, Axalta should be able to grow revenue and enhance margin as it benefits from material tailwinds.

Due to Axalta’s leading positions in the refinish and light vehicle end markets, the company has the opportunity to be an industry consolidator or to be acquired as the global coatings players continue to focus scale. Both Akzo Nobel and Nippon Paint expressed an interest in Axalta in late 2017. The recent decline in the stock price has made the valuation more attractive, and with Berkshire Hathaway as the largest shareholder, there is also a possibility that Berkshire makes a bid for the company.

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About the instructor:

Ben Claremon joined Cove Street in 2011 as a research analyst. He also serves as a Co-Portfolio Manager for our Classic Value | Small Cap Plus strategy. Previously he worked as an equity analyst on both the long and the short side for hedge funds Blue Ram Capital and Right Wall Capital in New York, and interned at West Coast Asset Management in Santa Barbara. Prior to that, he spent four years with a family commercial real estate finance and management business. Mr. Claremon was also the proprietor of the value investing blog, The Inoculated Investor. His background includes an MBA from the UCLA Anderson School of Management and a BS in Economics from the University of Pennsylvania’s Wharton School.