Tuesday Ticker: Will Warren Buffett buy Axalta?

Analysts from Citi Research have mused that Axalta may be a takeover target, possibly by Warren Buffett's Berkshire Hathaway. Buffett already owns 9.6 percent of the outstanding shares of Axalta.

By Jeff Sanford

Toronto, Ontario — October 17, 2017 — This week’s Tuesday Ticker: Stock markets continue to hit new record highs, analysts wonder if Warren Buffett might buy Axalta, Kobe stock values plunges to the surprise of absolutely no one, and much, much more!

Stocks continue to hit record highs. The high valuations have some analysts wondering if markets are at some kind of peak, with an inevitable valley waiting ahead. The CEO of major investment firm BlackRock, Larry Fink, spoke at a conference last Friday and was quoted as saying that financial markets are ignoring underlying risk. He said there could be a “big correction” if a major surprise world event shocked the economic system. Fink went on to compare current markets to 2007, when he says there was a similar amount of risk in the system and stock valuations were relatively high. The Great Recession rolled in the very next year. All eyes will be on the results filed by corporations in the coming earnings season as investors look for an answer about whether the optimism around current valuations are justified.

Last week Axalta had to issue revised financial estimates for the third quarter. The company is dealing with rising costs on key inputs like propylene, a basic building block for many of the products the company produces. The cost of the basic raw material used for white paint, titanium dioxide, has also been rising.

One report distributed by Citi Research suggests margins at the company will be compressed by 90 basis points, or just a bit under one percent in the first half of 2018. According to the researchers, Axalta was granting price concessions to auto and industrial customers in the first half of this year to maintain market share. The Citi analyst predict that the company will now have to increase prices over two or three quarters to maintain financial health.

The company’s refinish business is a very stable part of the company’s business portfolio, but overall growth is lagging others in the industry, such as PPG, according to the Citi analysts.

As well, they’ve mused about the possibility of Axalta becoming a takeover target. One company mentioned that might be interested in Axalta was Warren Buffett’s Berkshire Hathaway. Buffett already owns 9.6 percent of the outstanding shares of Axalta.

Along with rising input costs, Axalta executives also cited recent natural disasters as another reason growth will slow a bit over coming quarters. Management indicated it now expects sales growth of 6 to 7 percent, down from earlier estimates of a 7 to 8 percent growth rate. Axalta shares have sold off a bit over the last three months, declining by more than 5 percent to trade around $28.30 USD.

Canada’s largest publicly-traded dealership company, AutoCanada, announced last week the organization has entered into an agreement to purchase 90 percent of the issued and outstanding shares of Planète Mazda. The acquisition is the first Mazda dealership for AutoCanada and becomes its 23rd brand. Planète Mazda is located a short distance from Montréal on the north shore in Mirabel, bringing the number of AutoCanada dealerships in the region to four.

“This is a very important acquisition for AutoCanada,” said Steven J. Landry, the President and CEO of AutoCanada. “The Loiselle family has established a strong presence in the area and we look forward to partnering with Sylvain Loiselle and the entire Planète Mazda team to accelerate their growth. The acquisition marks the addition of a new brand to our portfolio and the start of our relationship with Mazda Canada. It advances our strategy of adding new brands in metropolitan areas to expand and diversify our dealer network and drive sustainable long-term growth.”

As part of the transaction, AutoCanada will lease the dealership lands, including a 35,000 sq. ft. facility made up of an 18 car showroom and 22 service bays.

Shares of AutoCanada continue to rise. As the western economy recovers and the company continues to expand eastward investors continue to buy up shares, with stock in the company rising almost 3 percent in just one day last week. AutoCanada releases financial results for the third quarter Thursday, November 9, 2017 after market close.

LKQ Corporation announced it will release its third quarter 2017 financial results before the market opens on Thursday, October 26, 2017. LKQ will host a conference call and webcast on October 26, 2017 at 10 a.m. EST to discuss the results.

Related Market Notes

– Kobe Steel recently shocked markets with an admission some product certifications had been faked, as reported by Collision Repair magazine. At first only Japanese car companies were thought to be involved. A later report notes that Ford has admitted it used aluminum from Kobe in car hoods built in China.

– The Trump administration is demanding that NAFTA regulations be rewritten so that vehicles would have to have at least 85 percent North American content to qualify under the deal. Canadian and Mexican officials have balked at the idea and consider it, basically, nuts. At a time when cars are being loaded with more electronic components (typically manufactured in Asia) this requirement would be nearly impossible to meet.

The timelines suggested for implementation of these new rules have also been described as impossible to meet. According to Flavio Volpe, President of Canada’s ‎Automotive Parts Manufacturers’ Association, the demands are “madness.”

– CarGurus, an online marketplace for used and new car sales, went public last Thursday. Shares were sold in the initial public offering for just $16 a share, but quickly rose, trading as high as $30 a share by the end of the first day of trading. The founder of CarGurus is Langley Steinert, the same guy who started TripAdvisor.

– In Europe, a company called AMG Advanced Metallurgical Group NV saw shares jump by 160 percent in the wake of an announcement the company will begin production in 2018 of a substance called spodumene. The stuff is a source of lithium, a vital component in high-performance batteries. The shares seem to be skyrocketing in the wake of announcements by various governments that gasoline-powered vehicles will increasingly be legislated out of existence in favour of electric cars. The announcements have driven a boom in the price of lithium and the shares prices of companies that can produce it.


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