PPG Poised to Gain from Key Market Strength, Acquisitions

On Oct 17, we issued an updated research report on PPG Industries (PPG). While the coatings giant should benefit from continued strength across North American automotive and aerospace markets, synergies from acquisitions and cost containment measures, it remains exposed to currency headwind and raw material cost pressure.

PPG Industries’ adjusted earnings for third-quarter 2014, reported on Oct 16, topped the Zacks Consensus Estimate. Reported profit surged on gains across major regions, especially Europe, and the company’s cost reduction initiatives. Revenues rose year over year but trailed expectations. The company expects its strong earnings performance to continue going forward.

PPG Industries, a Zacks Rank #3 (Hold) stock, 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 benefiting from healthy momentum across major end-use markets such as automotive OEM, automotive refinish and aerospace and continued demand recovery in Europe.

PPG Industries is also taking steps to grow its business inorganically by making a number of acquisitions. The acquisition of Akzo Nobel’s (AKZOY) North American architectural coatings business has reinforced its branded paint product offerings and scale in the North American architectural paint market.

Moreover, the proposed buyout of Mexico’s leading paint company – Consorcio Comex S.A. de C.V. – for $2.3 billion represents a significant move by PPG Industries as it will reinforce its architectural coatings business in Mexico and Central America by offering a leading architectural coatings portfolio.

PPG Industries also has an impressive record of returning cash to shareholders through dividends and share buybacks. The company has already spent $719 million on dividends and share repurchases this year.

However, PPG Industries remains exposed to raw material cost pressure and unfavorable currency exchange swings. The company sees currency headwinds in fourth-quarter 2014 stemming from a weaker euro (vis-à-vis dollar) and expects an unfavorable impact of $60-$70 million on its sales.

Moreover, some of the company’s end markets still remain weak. Commercial construction market in the U.S., although recovering lately, is expected to remain sluggish in the near future. While the company is seeing improvements in Europe of late, it may continue to face softness in the region with weak economic activity in some areas.

Other Stocks to Consider

Other companies in the chemical industry worth considering include Valhi, Inc. (VHI) and LyondellBasell Industries NV (LYB). While Valhi carries a Zacks Rank #1 (Strong Buy), LyondellBasell holds a Zacks Rank #2 (Buy).