For some time we have been talking about how expensive the coatings space is in the US. The stocks have done very well and the multiples are very high – too high in our opinion as they discount earnings growth relative to the market that looks unlikely. (See our September Chemicals Monthly.)
The sector has done well because of the rapid improvement in the US Auto industry as well as a meaningful pick-up in home repair and repainting. Part of the positive view on the sector is driven by the expectation that US housing starts are recovering, but as we wrote in July, we do not see any housing recovery being that impactful on the overall architectural coatings business.
We have seen a couple of meaningful transactions in the space in the last few weeks, with DuPont selling its Automotive business and now Cytec selling its coatings resins business. Both of these have been to private equity and both have been for very high prices. While DuPont in particular has made no secret of its desire to sell its coatings business, the current high multiples in the market have helped it and Cytec secure good prices. The willingness of sellers to part with businesses today suggests that they also believe valuations are high.
We continue to believe that there is a bubble in coatings valuations and find it hard to justify and upside from current levels.