Global

Comparing Axalta Coating Systems Ltd. (AXTA) and Carvana Co. (CVNA)

Axalta Coating Systems Ltd. (NYSE:AXTA) shares are down more than -6.33% this year and recently decreased -0.43% or -$0.13 to settle at $30.31. Carvana Co. (NYSE:CVNA), on the other hand, is up 117.57% year to date as of 06/29/2018. It currently trades at $41.60 and has returned 3.07% during the past week.

Axalta Coating Systems Ltd. (NYSE:AXTA) and Carvana Co. (NYSE:CVNA) are the two most active stocks in the Specialty Chemicals industry based on today’s 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect AXTA to grow earnings at a 13.36% annual rate over the next 5 years.

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. Axalta Coating Systems Ltd. (AXTA) has an EBITDA margin of 15.7%. This suggests that AXTA underlying business is more profitable AXTA’s ROI is 5.90% while CVNA has a ROI of -49.20%. The interpretation is that AXTA’s business generates a higher return on investment than CVNA’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 -0.25. Comparatively, CVNA’s free cash flow per share was -8.78. On a percent-of-sales basis, AXTA’s free cash flow was -1.4% while CVNA converted -0.14% of its revenues into cash flow. This means that, for a given level of sales, CVNA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. AXTA has a current ratio of 2.30 compared to 1.30 for CVNA. This means that AXTA can more easily cover its most immediate liabilities over the next twelve months. AXTA’s debt-to-equity ratio is 2.79 versus a D/E of 19.33 for CVNA. CVNA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AXTA trades at a forward P/E of 19.62, a P/B of 5.14, and a P/S of 1.63, compared to a P/B of 34.96, and a P/S of 5.47 for CVNA. 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AXTA is currently priced at a -11.71% to its one-year price target of 34.33. Comparatively, CVNA is 25.72% relative to its price target of 33.09. This suggests that AXTA is the better investment over the next year.

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. AXTA has a short ratio of 4.45 compared to a short interest of 9.05 for CVNA. This implies that the market is currently less bearish on the outlook for AXTA.

Summary




Axalta Coating Systems Ltd. (NYSE:AXTA) beats Carvana Co. (NYSE:CVNA) on a total of 10 of the 14 factors compared between the two stocks. AXTA is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. 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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