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Axiall Corp (AXLL): This Undervalued Company Is Benefiting From Multiple Drivers

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Axiall Corp (NYSE:AXLL)Thematic investing, betting on one single trend materializing, is inherently risky, because the future could always turn out very different from what we initially anticipated. Instead, I like to focus on undervalued companies benefiting from multiple drivers.

Chlor-alkali products such as caustic soda accounted for about 60% of its 2012 revenues, while building products and aromatics contributed the remaining revenues for Axiall Corp (NYSE:AXLL). Among the world’s largest producers of chlor-alkali products, it is a beneficiary of both the shale gas boom, and the housing market recovery. These two drivers could make it a solid consideration for your portfolio.

Cost advantage relative to other global players

According to a 2012 study by IHS, electricity represented 38% of 2012 cash costs for chlor-alkali. With the shale gas boom resulting in lower natural gas prices and reduced electricity costs, Axiall Corp (NYSE:AXLL) and other large producers of chlor-alkai now have a significant cost advantage over their competitors globally.

Firstly, North American producers are now manufacturing chlor-alkali at half the cost of that of their European counterparts. Companies like Axiall Corp (NYSE:AXLL) also have lower manufacturing chlor-alkali costs than Chinese producers relying on coal for their energy consumption. With China and Europe making up close to 60% of the global chlor-alkali capacity, there exists an opportunity for North American producers to gain more market share.

Secondly, value-to-cost ratios are a key determinant of both import competition and export opportunities. For example, North American cement producers are relatively insulated from foreign importation risks, because of the weight of cement makes it uneconomical for transportation over long distances. On the other hand, Axiall Corp (NYSE:AXLL) is well-positioned to benefit from the increase in North American exports, given favorable value-to-cost ratios. IHS forecasts net exports of caustic soda by U.S. producers to grow from two million dry metric tons to three million dry metric tons by 2015, with net exports as a percentage of total demand increasing to 10%.

Two ways to play the housing market recovery

Given that polyvinyl chloride (PVC) is widely used in flooring for homes, the health of the housing market is a key indicator of PVC demand. According to a Bloomberg news article, housing starts increased by 6.8% month-on-month to an annualized rate of 914,000 for May 2013. Management estimates operating rates for the U.S. and Canadian PVC industry to rise above the current 90% level in 2014 and 2015. Axiall should be a beneficiary of this, given its status as the fourth largest PVC producer in North America based on capacity.

Axiall also has a building products business engaged in the manufacturing of window and door profiles and mouldings products, and siding, pipe and pipe fittings. This segment contributed to 18% of Axiall Corp (NYSE:AXLL)’s 2012 revenues. A closely watched indicator for building products is the National Association of Home Builders (NAHB) Remodeling Market Index (RMI). The RMI represents the consensus view of 2,000 residential remodelers regarding future quarterly remodeling market demand. The RMI for the first quarter of 2013 of 49 was the third highest reading registered since 2006.

Financial performance

Although Axiall Corp (NYSE:AXLL) increased quarterly net sales by 28% year-on-year to $1.1 billion in the first quarter of 2013, its adjusted earnings per share of $0.75 fell short of consensus earnings estimates of $1.17. Several small unplanned manufacturing outages and higher prices of ethylene, the raw material used in manufacturing PVC, were the key reasons for the earnings disappointment. Despite this minor setback, I am optimistic that PVC price increases should offset the rise in ethylene costs in the coming quarters.

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