By Jeff Sanford
Toronto, Ontario — October 31, 2017 — This week’s Tuesday Ticker: AkzoNobel and Axalta talk merger, Boyd’s good story, rising palladium prices, and much, much more!
-Markets continue to trade near record highs. Monday the S&P 500 and the Nasdaq hit record levels as earnings from tech companies continued to come in above expectations. How long can the good times last?
Some say markets are ready for a pullback. The S&P 500 just posted its second longest streak without a five percent decline, and so this is a sign strong markets are getting a bit long in the tooth. There are reasons to think markets could be fragile. Treasury Secretary Steve Mnuchin recently threatened Congress saying that a failure to pass Trump’s upcoming tax cut bill would create a market crash; “… you’re going to see a reversal of a significant amount of these gains,” he was quoted as saying. Others note that the amount of assets investors are holding in cash (often through money market funds) is at a record low. The amount mutual funds are holding in cash is also sits at an all-time low. One analyst noted this past week, “There are a lot of fully-invested bears out there. There is not much sidelined cash left to push stocks higher.”
On the other hand, many think the market optimism is justified and that the growth is strong. According to the bulls global growth is sending markets around the world higher. Stocks are not only rising in the US, but in many markets. That is, there is something more than the policies of Donald Trump driving stock prices to record highs. Share prices have risen higher than US markets in Japan, Germany and France. Because global economic growth is generally strong, share valuations are justified.
AkzoNobel
-Several reports in major news outlets including the New York Times, Bloomberg and the Wall Street Journal, note that AkzoNobel NV is exploring a merger with Axalta. According to the reports the Dutch company said Monday it’s in “constructive discussions” regarding such a merger. Analysts were quick to note that the deal would be a good one. It would be between equals. The two companies are number three and four in the world of big global paint makers. Shares in Axalta soared nearly 22 percent on the news. According to one analyst the deal would be the “ideal poison pill” that would make AkzoNobel “undigestable” for PPG, which had tried to acquire AkzoNobel this past spring and summer. According to Dutch law PPG can’t make another bid for AkzoNobel until December 1st. It is said that AkzoNobel and Axalta may hustle to get a deal done by that time.
AkzoNobel has announced it plans to spin off its specialty chemicals division. According to one report that divestiture would concentrate AkzoNobel’s business solely on coatings, and so, “… a tie-up with Axalta, the no. 1 supplier to the North American heavy truck market, would round out its business to include vehicle coatings.” The deal would be the first major first merger undertaken by the new CEO of AkzoNobel, Thierry Vanlancker, who took on that role just this past July when Ton Buechner resigned for health reasons. Vanlancker has had to cut the overly optimistic earnings estimates that Buechner “made in the heat of the takeover battle,” according to one report. Since then AkzoNobel had reduced earnings projections twice in six weeks. A deal with Axalta would provide a new and interesting story for investors. It’ll be interesting to see how this plays out.
In related news the British universities pension scheme fund manager (USS) said last Thursday it planned to withdraw a proposal to nominate Eric Meurice as a supervisory board member of AkzoNobel. USS had sided with other shareholders in the attempt to force AkzoNobel to open negotiations with PPG. A New York hedge fund, Elliott Advisors, had lead the attempt to force a merger between AkzoNobel and PPG. Last week AkzoNobel’s supervisory board announced it did not support the proposal to appoint Meurice, the former chief executive of a semiconductor maker. AkzoNobel wanted shareholders to choose between Meurice and another nominee, Patrick Thomas, the head of a German plastics company. USS released a statement saying, “Asking two extremely strong candidates to compete against each other for a single position, as has regrettably been decided by AkzoNobel, is not the best way to achieve the strongest board for the company.” USS dropped its candidate.
Sherwin-Williams Co.
-SHW announced its third quarter earnings. Profit fell to $317 million, or $3.33 per share. This was lower than the $387 million ($4.08 per share) registered in the same period last year. Revenue climbed by 37% to $4.51 billion. This huge jump reflects the Valspar acquisition. Even so, net income fell, dropping 18 percent to $317 million. The drop was partly blamed on the recent hurricanes, a common theme among companies reporting earnings this season. SHW management estimated that sales would have been $50 million higher had the hurricanes not hit.
BASF
-Germany’s BASF reported a sharp rise in third-quarter net profit, “… due in part to the strong performance of its chemicals division, which benefited from increased sales volumes and significantly higher sales prices, particularly in Asia,” according to a report. Net profit was EUR 1.34 billion. The analyst consensus had been that profit would be EUR 1.12 billion.
Uni-Select
-Uni-Select will hold a conference call between management and financial analysts to discuss 2017 third quarter results. The conference call will be held on Thursday, November 9, 2017 at 8:00 A.M. Eastern.
LKQ
-Parts recycler LKQ Corporation announced that its Specialty Segment, Keystone Automotive Operations Inc., agreed to acquire the aftermarket business of Warn Industries Incorporated. Warn manufactures high performance vehicle equipment and accessories. Warn is a wholly owned subsidiary of Dover Corporation. Established in 1948, Warn’s aftermarket business offers winches, hoists, locking hubs and bumpers. The transaction is expected to close in the fourth quarter.
Boyd
-A report on a popular investing website covered the good story at Boyd this week. The analyst notes that the Boyd Group Income Fund has returned 482 percent over the last five years. And while the yield on the income fund (the percentage of profits paid out) is just a tiny, 0.55 percent, as an income fund the security is held by, “… many investors are in it for the huge amount of capital gains [increases in stock price] and not for the distributions.” The analyst went on to say the, “The industry is still extremely fragmented, so there is still a tonne of room for potential acquisition opportunities over the next decade… The management team has done a fantastic job of buying up its smaller competitors and using its expertise to drive synergies. Boyd has been ramping up on acquisitions, while keeping its balance sheet relatively healthy and its debt levels fairly low.”
Also noted is the strong growth in revenue: “Over the last 10 years, Boyd has grown its revenue from about $190 million to about $1.47 billion… That’s a ridiculous amount of growth that usually only small-cap stocks can offer. The long-term momentum that the company is experiencing seems unstoppable…” The analyst notes that shares have taken a 12 percent dip of late. This is a buyer opportunity. “Approximately 63 of Boyd’s collision repair centres in Florida and Georgia were closed during the hurricane season, but they have since been re-opened. None of these locations sustained major damage, but the third-quarter results will be negatively affected. Should a sell-off occur following the release of the company’s Q3 earnings, it may be a wise move to load up on shares if the general public makes a big deal of a temporary short-term issue,” according to the report. The analysis winds up saying, “Boyd is a high-flying growth stock that has flown under the radar of most investors. The company is not showing any signs of slowing down, so investors should expect management to continue wheeling and dealing, which will continue to drive the stock to much higher level.” You can’t get a better story than that.
Related Market Notes
-Recyclers will be enjoying the recent spike in the price of the key metal palladium. As US consumers replace autos lost in the recent hurricanes the price of palladium hit 16-year high these past few weeks. Experts think the price may rise further yet. Palladium is used in catalytic converters. As auto sales rise in China and as gasoline cars become more popular in Europe after the recent diesel emissions scandal demand will continue to rise. According to one report, “Palladium touched a high of $1,010.50 per ounce on Monday, the highest level since 2001. Last month, palladium prices rose above platinum for the first time since 2001.” The increase in the price of palladium will be good for auto recyclers who recover the metal from catalytic converters.
