Platform Specialty Products Corporation (NYSE:PAH) and Axalta Coating Systems Ltd. (NYSE:AXTA) are the two most active stocks in the Specialty Chemicals industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect PAH to grow earnings at a 1.85% annual rate over the next 5 years. Comparatively, AXTA is expected to grow at a 14.88% annual rate. All else equal, AXTA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Platform Specialty Products Corporation (PAH) has an EBITDA margin of 9.86%, compared to an EBITDA margin of 14.94% for Axalta Coating Systems Ltd. (AXTA). This suggests that AXTA underlying business is more profitable. PAH’s ROI is 2.80% while AXTA has a ROI of 10.80%. The interpretation is that AXTA’s business generates a higher return on investment than PAH’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. PAH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, AXTA’s free cash flow per share was +0.31. On a percent-of-sales basis, PAH’s free cash flow was 2.64% while AXTA converted 1.84% of its revenues into cash flow. This means that, for a given level of sales, PAH 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. PAH has a current ratio of 1.90 compared to 2.10 for AXTA. This means that AXTA can more easily cover its most immediate liabilities over the next twelve months. PAH’s debt-to-equity ratio is 1.93 versus a D/E of 3.05 for AXTA. AXTA is therefore the more solvent of the two companies, and has lower financial risk.
PAH trades at a forward P/E of 11.78, a P/B of 1.16, and a P/S of 0.90, compared to a forward P/E of 19.21, a P/B of 5.71, and a P/S of 1.75 for AXTA. PAH is the cheaper of the two stocks on an earnings, book value and sales basis. 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”. PAH is currently priced at a -24.7% to its one-year price target of $15.18. Comparatively, AXTA is -7.72% relative to its price target of $32.53. This suggests that PAH is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for PAH and 2.40 for AXTA, which implies that analysts are more bullish on the outlook for AXTA.
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. PAH has a beta of 3.17.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. PAH has a short ratio of 7.67 compared to a short interest of 4.23 for AXTA. This implies that the market is currently less bearish on the outlook for AXTA.
Platform Specialty Products Corporation (NYSE:PAH) beats Axalta Coating Systems Ltd. (NYSE:AXTA) on a total of 8 of the 13 factors compared between the two stocks. PAH has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, PAH is the cheaper of the two stocks on an earnings, book value and sales basis, PAH is more undervalued relative to its price target. Finally, CC has better sentiment signals based on short interest.