We have reaffirmed our Neutral recommendation on PPG Industries (PPG) following its mixed second-quarter 2013 results. While the company is expected to benefit from strength across the North American automotive OEM and aerospace markets, we maintain our cautious stance factoring in the lingering weakness in the European market.
Why Held?
The coatings giant beat earnings expectations in the second quarter, reported on Jul 18, riding on its cost reduction initiatives and strong results from its coatings business, backed by sales gains across automotive OEM and aerospace markets.
Adjusted earnings of $2.45 per share for the quarter topped the Zacks Consensus Estimate of $2.34. Revenues rose by double digits but missed expectations. Strong momentum across North America and Asia was somewhat masked by sustained weakness in Europe. The company expects earnings momentum to continue in the third quarter.
PPG Industries has a diversified business, both in terms of products offered and geographical presence. It has a leading position in several paints and coatings end markets.
PPG Industries is taking steps to grow its business inorganically by making a number of acquisitions. The acquisition of the North American architectural coatings business of Dutch paints company AkzoNobel, N.V. (AKZOY) has expanded PPG Industries’ branded paint product offerings and scale in the North American architectural paint market.
PPG Industries is pursuing restructuring of its European operation, which is expected to fetch meaningful cost savings this year. Moreover, the company’s Board recently cleared a new $102 million business restructuring program focused on achieving cost synergies associated with the North American architectural coatings business takeover. PPG Industries also has an impressive record of returning cash to shareholders through dividends and share buybacks.
However, PPG Industries is expected to continue to face macroeconomic challenges going ahead. While the company had a decent second quarter, it expects continued softness in Europe with declining economic activity and foresees a challenging demand environment in the region.
Moreover, PPG Industries remains exposed to raw material cost pressure. Some of the key end markets such as non-residential construction, architectural coatings and electronics also remain sluggish.
Other Stocks to Consider
Other companies in the chemical industry that are worth considering include Cytec Industries Inc. (CYT) and Northern Technologies International Corp. (NTIC) with both retaining a Zacks Rank #1 (Strong Buy).
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