Industrials

Why DuPont Is Called to Rise 25% and Axalta Could See 35% Upside

Axalta Coating Systems Ltd. (NYSE: AXTA) may not be the most exciting stock in a world that is paying 50 and 100 times revenues for new hot growth companies that are losing money. After all, paint and high-performance coatings for cars don’t have the same ring as explosive growth that comes with a coronavirus-resistant business model in the cloud.

Sometimes it is these less visible and less exciting companies where the best values can be found for investors who are looking for new ideas. The team at BofA Securities has a Buy rating on Axalta, and the firm just added the coatings player to its prized US 1 List. That focus list notes also showed that Axalta’s price objective was raised to $31 from $27, which implies 35.6% upside to the firm’s new target.

While the US 1 List call was focused mostly on Axalta, there was also a very bullish outlook on DuPont de Nemour Inc. (NYSE: DD) has 25% implied upside. That call is highlighted below.

Most Buy and Outperform ratings now come with upside targets that imply a total return of about 10%. Maybe investors really should be excited about what sounds so unexciting on the surface.

Remember that no single analyst call, no matter how positive or how strong the conviction sounds, should ever use a single analyst report as the only reason to buy or sell a stock.

According to BofA’s Steve Byrne and his team, the auto cycle is turning and the team is adjusting expectations for an uplift in production. Their note specified that recent auto data is inflecting and beating expectations. This all adds up to a view that the auto cycle has bottomed.

The COVID-19-related shutdowns have caused severe damage to the automotive market around the world. Auto original equipment manufacturers had shut down their manufacturing plants, the body shops were closed, vehicle miles plunged and auto sales fell off the proverbial cliff. BofA noted that this is now five months beyond April’s trough and the recovery in the auto sector appears to be better than what was expected.

Vehicles miles traveled were shown to be down 40% in April. That reading was down by only 13% by June. Byrne’s report also noted that light vehicle sales in the United States also were seeing less damage on an annualized basis: 15.2 million (−10.5% year on year) in August, compared with −47.7% in the April sales trough.

Another boost is that other markets for chemical companies with an automobile focus are also improving significantly. BofA pointed out that North American peak traffic levels remain nearly 50% below normal, but traffic has moved sharply higher elsewhere. Their view is that peak traffic has returned to normal in many European cities and is almost 20% higher in Chinese cities.

While the BofA team also finds value in positioning for a production upturn, and while it views Axalta’s rivals as the best ways to position for an auto recovery, Axalta is deemed to have particularly strong value. The report said:

In our view, estimates and valuation are unsustainably low in light of improving end markets, historically cheap relative valuations, and high bearish investor sentiment. The company remains a top quality pick given its sustainably strong free cash flow and leading market position in most of its major regions and key businesses. We also expect management to provide strategic clarity in future quarters, supporting a rerating.

BofA has raised Axalta earnings per share expectations. The old estimates of $0.80 per share in 2020 and $1.50 per share for 2021 were raised to $0.90 and $1.70, respectively. Refinitiv showed that Axalta’s consensus price target was $26.83 ahead of this price hike, and the street-high was up at $33.

DuPont has a Buy rating, and BofA raised its price objective to $70 from $67. Of course, this company is much more diversified. It was last seen trading near $55.75 a share, and the consensus target price is $64.10. According to BofA, DuPont will benefit from many of the same tailwinds noted in this report. The firm also sees better performance in auto, electronics and construction markets.

Ongoing outage-related headwinds in the transportation and industrial segments were noted in DuPont, hence the projected 25% upside, compared with the 35% upside projected in Axalta. The firm’s higher price objective also was seen from a higher cash balance related to its Hemlock sale and based on higher sector multiples. DuPont also comes with a 2% dividend yield.

Other BofA sector price objective hikes are shown below:

Celanese Corp. (NYSE: CE) traded close to $109, with a Neutral rating in the sector call, and its prior $104 price objective was raised to $115.

Eastman Chemical Co. (NYSE: EMN) was closer to $79, and BofA had a Neutral rating, even though its price objective was raised to $85 from $75 in the call.

PPG Industries Inc. (NYSE: PPG) traded near $120, and BofA has a Neutral rating but still raised its price objective to $128 from $124.