We recently compiled a list of the 10 Undervalued Chemical Stocks to Invest In. In this article, we are going to take a look at where Axalta Coating Systems Ltd. (NYSE:AXTA) stands against the other undervalued chemical stocks.
Key Trends Shaping the Future of the Chemical Industry
Chemicals are essential to our daily lives and play a crucial role in many sectors. The chemical industry provides the materials needed to create a wide range of products, from medicines and agricultural chemicals to plastics and cleaning supplies. This industry also supports innovations in renewable energy, such as solar panels and wind turbines. It also helps produce lightweight materials for vehicles, advanced batteries for electric cars, and durable building materials.
Increasing demand for sustainable and innovative products, advancements in technology, and urbanization, are some of the key factors driving growth of the chemicals market. According to a report by The Business Research Company, the chemicals market was valued at $5.11 trillion in 2023. The market is expected to grow at a compound annual growth rate (CAGR) of 8.7% during 2024-2028 to reach a value of $7.78 trillion by the end of the forecast period.
The chemical industry is currently experiencing significant changes driven by sustainability and technological advancements. The industry plays a crucial role in addressing global challenges like climate change and resource efficiency. According to a recent sustainability report titled “Sustainability Starts with Chemistry,” released by the American Chemistry Council (ACC) in May 2024, ACC member chemical companies have made significant progress in reducing emissions. Since 2017, these companies have cut sulfur oxide (SOx) emissions by 43% and nitrogen oxide (NOx) emissions by 18%.
The report highlights that member companies of the ACC are exploring, developing, and deploying various innovative technologies that reduce emissions. These include methods for capturing, using, and storing carbon, as well as producing lower-emissions hydrogen and exploring alternative feedstocks. This showcases their commitment to environmental responsibility and sustainable practices.
Innovation continues to be a top priority for the chemicals industry. On January 16, 2024, McKinsey & Company published an article that discussed a survey conducted by the company of over 200 senior leaders in North America’s chemical sector, including top executives from leading companies, investment firms, and startups. The survey found that chemical process innovation is viewed as the most important focus area, with 90% of investors and 97% of industry leaders planning to invest more than $50 million in this area over the next two years. While AI-assisted discovery is not considered the top priority, it remains a significant area of interest. According to the survey results, 43% of investors and 75% of chemical industry leaders are looking to invest over $100 million in AI-driven product development.
Digitalization is another crucial factor shaping the future of the chemical industry. According to Deloitte’s 2024 chemical industry outlook, digital investments in the sector declined in 2023, partly due to a sluggish US economy and high interest rates. After a 6.6% increase in 2022, spending on information technology in the chemical industry is expected to drop by 0.1% in 2023. However, this drop is likely to be short-lived. Many chemical companies are launching AI programs aimed at accelerating research and development for sustainable products, predicting the effects of production changes, and gaining valuable insights by tracking data throughout the entire value chain.
Overall, as the chemical industry embraces sustainability, innovation, and digital transformation, it positions itself for growth. Companies that prioritize these trends can not only contribute positively to the environment but also achieve better financial performance in the long run.
Methodology
To compile our list of the 10 undervalued chemical stocks to invest in, we reviewed our own rankings, sifted through ETFs, and consulted various online resources. From an initial pool of over 30 chemical stocks, we focused on those trading at under or around 15 times their forward earnings as of October 24. We further narrowed down our selection by looking for chemical stocks expected to show positive earnings growth this year.
Next, we ranked the best chemical stocks based on hedge fund holdings. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 10 undervalued chemical stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A worker in a paint manufacturing plant wearing a protective suit and mask.
Axalta Coating Systems Ltd. (NYSE:AXTA)
Forward P/E: 15.50
Earnings Growth: 31.20%
Number of Hedge Fund Holders: 47
Axalta Coating Systems Ltd. (NYSE:AXTA) is a specialty chemicals and materials company that produces and distributes coatings systems for various industries, including commercial vehicles and automotive refinish markets. The company serves customers in over 130 countries, offering coatings designed to enhance durability, prevent corrosion, and improve productivity.
The company is strategically focused on growth in the premium segment, leveraging its innovative single-visit application waterborne system, the launch of its fully automated mixing machine Irux Mix and automated color-matching technology, and a host of digital tools to attract new customers.
In the second quarter of 2024, Axalta Coating Systems Ltd. (NYSE:AXTA) reported impressive financial results, with net sales increasing 4.4% year-over-year to $1.35 billion. Net income rose by $52 million to $113 million, while adjusted EBITDA improved by $64 million to reach $291 million. Diluted EPS surged 89% year-over-year to $0.51, with adjusted diluted EPS rising 63% to $0.57.
In July, Axalta Coating Systems Ltd. (NYSE:AXTA) completed the acquisition of the CoverFlexx group, which specializes in coatings for automotive refinish and aftermarket applications aimed at economy customers in North America. This acquisition enhances the company’s product offerings by providing a wide range of coatings, aerosols, fillers, and paint shop accessories. With this acquisition, Axalta Coating Systems Ltd. (NYSE:AXTA) can better serve the economy segment, which presents significant growth potential.
Additionally, the company is introducing innovative products like its cabinet coatings, which are gaining popularity. These products are part of a focused strategy to prioritize market segments where Axalta Coating Systems Ltd. (NYSE:AXTA) can deliver strong value and achieve attractive returns. By leveraging its advanced technologies and expanding its portfolio, Axalta Coating Systems Ltd. (NYSE:AXTA) is well-positioned to enhance its market presence and drive future growth.
Analysts have a positive outlook on AXTA. Their 12-month median price target of $42.00 indicates a potential increase of 19% from the stock’s current price.
According to Insider Monkey’s database of over 900 hedge funds, 47 hedge funds held stakes in Axalta Coating Systems Ltd. (NYSE:AXTA) in Q2 2024.
Overall AXTA ranks 1st on our list of the undervalued chemical stocks to buy. While we acknowledge the potential of AXTA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AXTA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.