This Company Deserves a Spot on Your Watchlist
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Jan. 28, 2013, a long-awaited merger between a spun-off commodity chemicals unit of PPG (NYSE: PPG) and Georgia Gulf Corporation (GGC – defunct) became official. Valued at $2.1 billion, the deal created a company that is expected to produce revenues of $5 billion or more per year and become a major player in the commercial chemicals business. Known as Axiall (NYSE: AXLL), the company appears to be off to a promising start on the public markets. Since its inception, it has exhibited market-beating performance and looks well-positioned for future growth.
About PPG and Axiall
PPG is one of the leading manufacturers of practical and decorative laminates, coatings and other synthetic materials. The company is a major producer of rust-resistant coatings for the automotive and transportation industries. It also produces reflective coverings for signs and road markers. Since many of PPG’s coatings adorn military equipment, vehicles, and aircraft, a significant portion of its revenue comes from the aerospace and defense industries. However, it is not seen as particularly vulnerable to cuts in U.S. defense spending thanks to its deep roster of civilian customers. PPG maintains a responsive direct-sales team and also sells its products to a variety of international retailers and wholesalers.
Axiall was created by the merger of PPG’s commodity chemicals unit and the Georgia Gulf Corporation. The company is expected to produce revenues of over $5 billion and engage in the production of a variety of commonly-used solvents, chemicals and VOCs. Its signature products include chlorovinyl compounds like PVC resins, caustic soda, and common chlorine, as well as aromatics like acetane and cumene. It also engages in the production of a wide range of flexible, rigid, and liquid compounds that can be used in a variety of residential, commercial and industrial applications. Many of its chemicals are marketed under the Royal Group Technologies brand. Axiall employs at least 10,000 workers across North America.
One of Axiall's competitors is the Dow Chemical Company (NYSE: DOW). Dow is much larger than Axaill and produces a much wider range of products. Dow has a $40 billion market cap and revenues of over $56 billion in the last 12 months. Axiall is likely to be a more profitable company on a relative basis and have a higher profit margin that Dow’s 2%, but we have yet to find out the profitability of the combined unit. Analysts are expecting Dow’s earnings to grow substantially in the next 12 months.
How the Deal Was Structured
The terms of this deal were rather complex. First, PPG spun off its commodity chemicals division as a publicly-traded intermediary known as Eagle Spinco. All PPG shareholders were given the option to swap each PPG share for 3.2562 Eagle Spinco shares. Those who took advantage of this opportunity were then provided with Georgia Gulf shares on a one-to-one basis. After Georgia Gulf’s stock ceased to trade, these new shareholders were provided with “new” shares in Axiall. As part of the deal, PPG also received a cash payment of $900 million.
In the weeks since Axiall’s creation, the stock has performed well in relation to its peers and former parent. It has also outperformed the broader market by a substantial margin. On Jan. 29, Axiall’s shares began trading at around $54 per share. Since then, they have moved on a steady upward trajectory and touched a post-deal closing high of $60.08 on Feb. 14. As of late February, they have notched consistent closes above $59 per share and produced a return of about 11 percent.
This compares to an anemic S&P 500 return of about 1.5 percent during the same period. PPG has also demonstrated mediocre performance, sliding from a closing price near $141 per share on Jan. 29 to around $138 per share by February 15. This represents a decline of about 2 percent. As such, Axiall can be said to have outperformed the broader market by almost 10 percent. Meanwhile, it has outperformed PPG by about 13 percent.
Long-Term Prospects and Outlook
Based on Axiall’s positive performance during a mediocre stretch for the broader market, the company appears poised to enjoy further short-term gains. As a new company, it lacks accurate performance indicators like earnings per share, P/E ratios and beta readings. However, it seems logical that its performance will mirror that of its two major components. Since both were widely regarded as healthy companies before the spin-off and merger, it follows that Axiall represents a long-term value.
In addition, odd-lot investors technically received their Axiall shares at a discount. Although the deal provided an immediate arbitrage opportunity for sharp-eyed PPG investors, Axiall remains undervalued by several percentage points. This fact alone suggests that the company’s stock price will correct towards its “appropriate” valuation near $65 per share during the coming weeks.
In sum, Axiall may not provide aggressive traders with an opportunity for outsize short-term gains. However, it seems likely that the company will continue to meet or exceed earnings and revenue expectations. A period of secular economic growth may further brighten the company’s medium-term prospects. Barring an unexpected earnings miss or breaking-news development, Axiall is on the watchlist among other special situations at ArbIdeas.com and deserves a spot on every medium-term investor’s watch-list.
mthiessen has a position in Axiall. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!