By Jeff Sanford
Toronto, Ontario — October 31, 2016 — It’s been a busy week for many of the companies listed in the CRM Index, a group of publicly-traded stocks related to the collision repair sector. Sherwin-Willliams and Valspar have had to issue statements to appease regulators, Uni-Select has released it’s quarterly numbers and PPG, BASF and Axalta have all had positive news to report.
– Collision Repair magazine reported in March that Sherwin-Williams had struck a deal to acquire Valspar. Stock market regulators have recently required Sherwin-Williams and Valspar to officially comment on what appeared to be “excessive market speculation” following on rumours that parts of each company may have to be divested for regulators to allow the deal to go through. Both companies stated they “continue to believe that no or minimal divestitures should be required to complete the transaction.” The companies expect the deal to close by the end of Q1 of 2017
– Uni-Select continues to impress market watchers. The company has been on an acquisition spree of late. The solid deal-making has allowed the Canadian company comer to increases its revenues, even as the underlying economy remains relatively flat.
Uni-Select released its latest Q3 earnings numbers last week, and the company managed to surprise on the upside: Q3 revenues were up a very impressive 15 percent. This, “despite economic softness in Canada,” according to a press release announcing the results.
The Boucherville, Quebec based auto paint and parts supplier bumped revenues to USD $318.5 million in the third quarter. This is up from $276.2 million in the same period a year ago. The company said acquisitions boosted U.S. revenue by 25 percent to USD $202.2 million, while Canadian revenue grew by 1.9 percent to USD $116.3 million (the company reports all numbers in US dollars).
Profits came in at $17.3 million or 41 cents per share, an improvement on the 37 cents per share posted in the same period last year. In the release the company noted that organic sales (those not coming from acquisitions) fell 1.3 per cent in this quarter. This was due mainly to “economic challenges affecting its parts segment.” Last year the company sold its US parts distributor to a company affiliated with Wall Street legend Carl Icahn.
“Organic sales results were below our expectations, as a result of softer economic conditions in our Canadian business and a product line changeover in our US business,” Uni-Select CEO Henry Buckley was quoted as saying. “We remain highly focused on delivering profitable growth and extending our market share through our growth initiatives and by acquiring and integrating those select acquisitions.”
Analysts at Scotia Capital recently initiated coverage on Uni-Select. The bank put a $38.00 price target on the stock. The stock is currently trading just above $30 per share. Of the four analysts covering UNS, three rate it as a buy and one rates it as a hold.
– BASF continues to deal with the fallout from a major fire at a facility in Germany. But the company still posted better than expected results in Q3. The company announced Thursday that earnings before interest, tax and one-time items was 1.5 billion euros, or about $1.66 billion CAD. According to a Bloomberg report analysts had been expecting a lower profit of just 1.28 billion euros. The Citigroup analyst was off by 7 percent. The Bloomberg story quoted a Kepler Cheuvreux banker as saying, “Analysts have been too conservative [about BASF].”
– Paint maker PPG put a good spin on its earnings. Noting that the North American economy has been sluggish, the company has still declared it will continue to pay a quarterly dividend on its stock. The company stated the ability to financially maintain a dividend in such a choppy market is, “…a sign of confidence in its capital position amid declining growth trends in various key international markets …”
The Board of Directors of the Pittsburgh-based specialty materials and glass products company announced last week a divident of 40 cents per share, payable December 12 to shareholders of record as of November 10. This quarter marks the company’s 473rd consecutive dividend payment.
“On an annual basis, the company has paid uninterrupted dividends since 1899,” according to its release.” According to the report, “PPG shares have a consensus Buy rating and an average analyst 12-month price target of $113, which suggests additional premiums of 21 percent from current levels.” Last week, the company announced earnings of $1.56 per share on revenue of $3.79 billion. Quarterly profits were up a bit over 2.5 percent. The company did miss the consensus earnings estimate posted by analysts in advance of the release of the numbers.
– Axalta Coating Systems also reported this week. The company beat estimates by $0.01. In a conference call with analysts, Axalta CEO Charles Shaver explained the state of the business this quarter: “Despite some challenging macroeconomic conditions and end-market headwinds in certain geographies,” Shaver said the company delivered a “good third quarter with both top-line and bottom-line growth year-over-year.”
This quarter was an important one for the company. Private equity firm, Carlyle, exited its stake in Axalta. The company has appointed a new independent board member and completed two significant refinancings and launched multiple new products.
According to Shaver, “Axalta’s broader global business climate remains sound especially considering that the majority of our operating profit is generated by the fundamentally stable refinish end-market tied to the global-collision market. We’ve seen some slowing in the more economically sensitive auto and commercial vehicle related OEM markets much of which is a continuation of demand pressure that we’ve witnessed for some quarters now and has been well noted in the trade press.”
That is, recent highs in production among OEMs is tapering off a bit. October car sales are expected to be down. That fact is being reflected in Axalta’s business. Nevertheless, Shaver says, “We are pleased overall with our financial performance in the third quarter … for now it seems like global demand and the vast majority of our end-markets remains fundamentally stable and it’s possible that the recent pullbacks in markets such as North America heavy-duty truck are more mid-cycle corrections rather than multi-year downturns … Our core refinish as well as our light vehicle end markets saw continued revenue growth in the mid-single digits.”
Shaver also noted that the company, “… launched a key new refinish product in Europe, the Middle East and Asia (EMEA) called Syrox which is a mainstream waterborne coating system which is highly competitive in that market segment and we expect to roll out globally over time to fill a largely unserved market segment today. In addition, we also launched an early-standing primer in EMEA which further improves body shop cycle-time efficiency.”
The company completed two refinancing transactions which substantially reduced interest expense going forward. On the mergers and acquisitions front (M&A) the company also closed three transactions in the third quarter.
“We remain confident in the outlook and the contributions from these businesses in terms of both cost and revenue synergies and our acquisition-centered integrations are well on track. The pipeline of available M&A transactions remains fairly robust for Axalta as we continue to evaluate a variety of transactions to extend our global technology and market presence in key focus areas … In the meantime, our October $150 million debt repayment demonstrates our continued interest in and our commitment to reducing debt with excess cash flow and working towards our net leverage goal of 2.5x to 3x … Axalta is proud of its performance today and we’re certain from an operating execution standpoint; we’re just really getting going.”
Beyond the slight slowdown at the OEMS, when it comes to the refinish business, all is good according to Shaver: “We also note that our refinish business continues to perform largely as planned and offers an ideal counterweight to any new-build cycles. While our plans to grow share in other businesses also remain in place. We are confident in our medium and longer term success from this supply discipline and look toward to updating you on our progress along the way.”
Related Market Notes
– Mitchell announced the closing of a $50 million senior secured first lien term loan. The loan is an add-on under Mitchell’s existing Credit Agreement. Mitchell expects to use the proceeds of the term loan to continue, “… investing in technologies that … simplify the claim handling process across the Auto Physical Damage, Casualty and Pharmacy sectors.” According to Alex Sun, the company’s CEO, “We are thrilled that investors continue to show confidence in Mitchell. Our ability to attract capital allows us to deliver on our mission to achieve better outcomes for our clients. We look forward to expanding and enhancing our capabilities to support our clients in restoring their customers’ lives after a challenging event.”
– As new car sales pull back from record highs, some analysts are keeping an eye on stocks related to used cars, like CarMax, which was the subject of a report from Deutsche Bank this week. According to report on the Deutsche Bank study, “… used cars may be making a comeback. There appears to be a structural shift in affordability of used cars versus new cars,” according to a media story. “As a result, used car retailer CarMax Inc. appears ripe to benefit from this changing trend.”
The credit rating agency also notes that, “We have begun to notice significant acceleration in Used vehicle sales comps from franchised retailers. KMX (CarMax) also saw 8 percent same store growth in their non-suprime units in Q2 vs. total same store growth of 3 percent. This phenomenon is still in its infancy.”