On Jan 17, we retained our Neutral recommendation on PPG Industries (PPG). While it should benefit from strength across North American automotive OEM and aerospace markets, we prefer to tread with caution factoring in a still soft European market and raw material cost pressure.
Why Neutral?
The coatings giant’s adjusted earnings for fourth-quarter 2013, reported on Jan 16, topped the Zacks Consensus Estimate. Reported profit jumped on strength in the company’s coatings business and its cost management initiatives. Revenues rose by double digits and beat expectations. Healthy momentum across aerospace and automotive markets aided the results. PPG Industries sees favorable market conditions across these end-markets in 2014.
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 AkzoNobel’s (AKZOY) North American architectural coatings business has reinforced its branded paint product offerings and scale in the North American architectural paint market.
Moreover, PPG Industries is pursuing a $102 million business restructuring focused on achieving cost synergies associated with the North American architectural coatings business takeover. The company also has an impressive record of returning cash to shareholders through dividends and share buybacks. It has returned $1.35 billion to its shareholders in form of dividends and share repurchases in 2013.
However, PPG Industries may face macroeconomic challenges going ahead. While the company had a healthy fourth quarter with improving trends in Europe, it may continue to face softness in the region with weak economic activity and a still challenging demand environment.
Moreover, PPG Industries remains exposed to raw material cost pressure. Some of the key end markets such as non-residential construction, protective and marine coatings and European architectural coatings remain sluggish.
Other Stocks to Consider
Other companies in the chemical industry worth considering include L'Air Liquide SA (AIQUY) and Johnson Matthey plc (JMPLY) with both carrying a Zacks Rank #1 (Strong Buy).
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