Polyvinyl chloride (PVC) is that ubiquitous plastic used in so many applications. In the housing market alone, PVC makes pipes and pipe fittings, wire and cable coatings, house siding and windows, electrical wall boxes and fencing. With the housing boom slowing down, PVC supplies have been rising and prices have leveled out. We look at the potential effect on Axiall Corp. (AXLL.N), an Atlanta-based manufacturer of PVC.
The company is not only coping with weak prices for PVC, but rising prices for one of the main ingredients in its manufacture, ethylene. These trends are likely to hurt Axiall’s margins. The company has a negative StarMine Predicted Surprise of 4.4%, which leads us to believe that it will miss already-lowered earnings estimates when it reports results in early November.
Source: Eikon/StarMine
Consensus moves
Over the past 90 days, the I/B/E/S consensus estimate for Axiall has been lowered to 60 cents per share, down more than 40 cents. In fact throughout the period, the SmartEstimate has remained lower than the consensus and the consensus moved in the direction of the SmartEstimate. The SmartEstimate is still lower than the consensus at 58 cents. There is even a Bold Estimate of 55 cents. This estimate is by a highly rated analyst with a strong track history, so it’s worthy of attention.
Analyst recommendations have been pessimistic, too. There were five buy and strong buys versus five hold recommendations. There are now just four buy and strong buys, six holds and even a sell recommendation. Analysts do not expect earnings to recover next year and have lowered estimates for next year’s earnings by 30% in the past 90 days.
Source: Eikon/StarMine
Worrisome trends
As the housing boom stalls, the demand for PVC has fallen. On the earnings call, management conceded that the bad weather at the beginning of the year had hurt the company’s earnings. The last quarter of the year is once again expected to be seasonally weak. With no reduction in the supply of PVC, and weak demand for the product, it looks like Axiall won’t enjoy any pricing power. In fact, in August the company tried and failed to push through a two-cent increase in prices.
Margins also are under pressure from rising ethylene prices. Trailing 4Q operating margins have already fallen for the last four consecutive quarters and that trend is likely to continue as PVC prices have remained flat through the last quarter. Axiall also earns lower margins from sales outside North America, so increasing exports to offset weaker domestic demand is not an ideal option. Currently, exports account for 20% of revenues.
At the RBC Capital Markets Global Industrials conference held on Sept. 10, CFO Greg Thompson was grilled about everything from the pricing weakness to the weakening aromatics business, which accounts for 20% of revenues. Thompson clearly stated that he expected this side of the business to remain weak into 2015 and even indicated that they would look at “monetizing that business,” possibly implying it could be sold off. He also acknowledged that housing weakness in Canada, which accounts for 50% of the building products business, was also likely to hurt earnings.
Axiall is also considering the feasibility of a venture to produce ethylene in an effort to vertically integrate, but that project is likely to cost over $1billion, according to initial estimates. That kind of capital expenditure may help the company in the long run (this project is likely to begin in 2017 at the earliest), but in the meantime it will likely take a heavy toll on cash flows. Axiall already has $1.4 billion in total debt, double the levels of five years ago.
Source: Eikon/StarMine
Out of favor
The chart above shows that the key fundamental ratios at Axiall have seen deterioration from a year ago. It also lags the rest of the industry. That could be one reason why the company scores so poorly on the StarMine Smart Holdings model (with a score of 5 out of a possible 100), which indicates that the financials of this company do not align with those that institutional investors currently value. With little sign of good news on the horizon, look for Axiall to miss earnings estimates.
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