Axalta Coating Systems Ltd (NYSE:AXTA) stock soared 7% today after legendary value investor Warren Buffett snapped up 20 million shares through his holding company, Berkshire Hathaway Inc. (NYSE:BRK.B, NYSE:BRK.A).
Should you load up on AXTA stock before Buffett acquires a greater stake in the company? And why is the Oracle of Omaha buying the scarcely known AXTA stock to begin with?
Warren Buffett is a victim of his own success. Over 50 years he grew Berkshire Hathaway to the fifth-largest company in the world, constantly reinvesting its profits in new, lucrative businesses or doubling down on existing cash cows. A $1,000 investment in BRK stock at the end of 1964 would be worth more than $18 million today.
But that meteoric growth has come at a price. With a market capitalization of more than $350 billion, it’s much tougher to achieve the eye-popping returns of yesteryear. That’s why, when BRK makes acquisitions, they tend to be very large ones.
The acquisition of AXTA stock — 20 million shares for $28 a piece, a $560 million deal — is peanuts for Buffett, but materially significant for Axalta, which is now 8.7% owned by Berkshire Hathaway.
All-Time Highs? Buffett Doesn’t Mind
You might think it counterintuitive that AXTA stock was up more than 40% from its November IPO price when the Berkshire deal was announced, but Buffett doesn’t care if a stock is at all-time highs. When he began building a large stake in The Coca-Cola Co (NYSE:KO) in 1988, KO stock had risen for eight consecutive years and sported a P/E 91% above the S&P 500.
Buying Coca-Cola stock turned out to be one of the Oracle’s most prescient investments; through the end of 2014 KO stock was up thirteen-fold from its purchase price.
The $560 million purchase of AXTA stock goes down as the billionaire’s most recent stock purchase; other recent Buffett buys include Restaurant Brands International Inc (NYSE:QSR), Twenty-First Century Fox Inc (NASDAQ:FOXA) and Deere & Company (NYSE:DE), among others.
While the amount of AXTA stock Berkshire bought doesn’t quite amount to a monster acquisition, it reflects Buffett’s increasing fondness for the automotive industry. After all, some of Axalta’s biggest end-customers are body shops, light vehicles, and buses.
Oh, and with “rail” registering as one of AXTA’s most significant end-market customers as well, I wouldn’t be surprised to see Axalta’s products lining the sides of Burlington Northern Santa Fe trains in the near future. (Berkshire bought BNSF in 2009 for $26.3 billion.)
AXTA stock should augment Buffett’s October acquisition of Van Tuyl Automotive, a national U.S. car dealership.
Although AXTA stock currently trades at a sky-high 250 P/E, its future prospects make shares look far more attractive. At Buffett’s $28 per-share buy-in, AXTA stock was priced at just over 20 times 2016 EPS estimates. With private-equity powerhouse Carlyle Group LP still holding an additional 150 million shares of AXTA and looking to take some profits, I wouldn’t be surprised if Berkshire continued to build a position in Axalta Coating Systems for years to come.
With that in mind, pay heed to Warren Buffett’s famous attestation: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” He clearly believes the nearly 150-year-old Axalta won’t kick the bucket anytime soon, and investors now have the opportunity to buy AXTA stock at a price only marginally higher than the best investor of all-time.
An investment from Warren Buffett is a powerful endorsement, and with the automotive sector in the midst of a multi-year rebound, Axalta stock looks primed to coat your portfolio for years to come.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
