Global

Comparing Axalta Coating Systems Ltd. (AXTA) and RPM International Inc. (RPM)

Axalta Coating Systems Ltd. (NYSE:AXTA) shares are down more than -24.32% this year and recently decreased -4.71% or -$1.21 to settle at $24.49. RPM International Inc. (NYSE:RPM), on the other hand, is up 22.28% year to date as of 12/04/2018. It currently trades at $64.10 and has returned 4.41% during the past week.

Axalta Coating Systems Ltd. (NYSE:AXTA) and RPM International Inc. (NYSE:RPM) are the two most active stocks based on recent trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AXTA to grow earnings at a 11.51% annual rate over the next 5 years. Comparatively, RPM is expected to grow at a 11.13% annual rate. All else equal, AXTA’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 10.83% for RPM International Inc. (RPM). AXTA’s ROI is 5.90% while RPM has a ROI of 11.30%. The interpretation is that RPM’s business generates a higher return on investment than AXTA’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. AXTA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, RPM’s free cash flow per share was -0.57. On a percent-of-sales basis, AXTA’s free cash flow was 2.07% while RPM converted -1.42% of its revenues into cash flow. This means that, for a given level of sales, AXTA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. AXTA has a current ratio of 2.20 compared to 2.80 for RPM. This means that RPM can more easily cover its most immediate liabilities over the next twelve months. AXTA’s debt-to-equity ratio is 3.13 versus a D/E of 1.41 for RPM. AXTA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AXTA trades at a forward P/E of 17.28, a P/B of 4.70, and a P/S of 1.24, compared to a forward P/E of 17.10, a P/B of 5.25, and a P/S of 1.56 for RPM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. AXTA is currently priced at a -19.47% to its one-year price target of 30.41. Comparatively, RPM is -6.01% relative to its price target of 68.20. This suggests that AXTA is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. AXTA has a beta of 1.37 and RPM’s beta is 1.36. RPM’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. AXTA has a short ratio of 2.15 compared to a short interest of 3.37 for RPM. This implies that the market is currently less bearish on the outlook for AXTA.

Summary

Axalta Coating Systems Ltd. (NYSE:AXTA) beats RPM International Inc. (NYSE:RPM) on a total of 9 of the 14 factors compared between the two stocks. AXTA is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, AXTA is the cheaper of the two stocks on book value and sales basis, AXTA is more undervalued relative to its price target. Finally, AXTA has better sentiment signals based on short interest.

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