I recently highlighted the value on offer at chemicals company Axiall Corp (NYSE:AXLL) where I believed that investors had mis-read the company’s income statement and ignored the company’s potential free cash flow.


Axiall Corp (NYSE:AXLL) recently reported for the second quarter and the company’s strengths and synergies gained from its recent merger immediately became apparent. I believe that Axiall still has plenty of gas left in the tank.

However, it is important to remember that Axiall Corp (NYSE:AXLL) has nearly doubled its number of shares in issue and quadrupled its shareholder equity over the period. So, any per share or, to-equity comparisons, can be highly misleading without adjustment.

Axiall cash flow looking solid

Having said that, the benefits acquired from the acquisition are already starting to show through. After its first full quarter of operations the merged business generated gross profit of $231 million, a gross margin of 18% and operating margin of 10%. In comparison, during the same period last year, Axiall Corp (NYSE:AXLL) reported a gross margin of 10% and an operating margin of 3.2%.

Moreover, the company’s return on assets increased 50% to 1.2%, from 0.8% in the comparable period last year and return on equity ticked up from 2.5% to 3%.

On an EPS basis the company produced fully diluted EPS of $1.03, with 70.4 million shares, while during the same period last year the company’s EPS stood at $0.39, on 34.6 million shares, factoring in net income of $72.8 mil on the reduced share based of 34.6 million the company had EPS of $2.1 million, that is a 438% rise.

However, despite these good performance figures, the key reason that I’m still attracted to Axiall Corp (NYSE:AXLL) lies in the company’s cash flow. Excluding a $50 million change in working capital, which was mostly related to the further reorganization of debt, (Axiall issued $180 million in long term debt and paid down $250 million in debt during the quarter, 3% reduction in total debt) Axiall’s cash conversion ratio was round 63%. In addition, free cash flow would have come in at $80 million, 10% above the $73 million in net income the company reported.

Nonetheless, even including the change in working capital related to debt reorganization, Axiall still had a free cash flow of $25 million.

Axiall goals include cost saving as well as income

Moreover, Axiall Corp (NYSE:AXLL) is working hard to improve cash flow and net income. Management is aiming to achieve $115 million in annualized cost synergies over the next two years, which should boost operating margins to near 22% compared to the 10% realized now. These cost savings are expected to cost the company around $55 million to achieve but considering the fact that the savings are expected to be more than double the cost, I believe it is an investment worth making.

All in all, Axiall Corp (NYSE:AXLL) still has the makings of a great long term investment which I highlighted before. The company is working out cash and cost savings and should boost cash generation over the short to medium term. In addition, as I have highlighted in a previous article, the company is cheap in its sector compared to larger peers such as Dow Chemical and, so far, the market has failed to realize this even after this great set of Q2 results.