This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
The story with the industrial sector in this earnings season has been
that there has been great variability in performance. It is very much a
sector picker's market, and the broad based industrial plays like GE or Alcoa(NYSE: AA)
have reported this theme. In short, Europe has been weak, but China has
rebounded somewhat, the US is doing okay and the areas of relative
strength overall are in things like housing, autos and aerospace. With
this understood, is there a company with good exposure to these sectors?
PPG to the Rescue
I think PPG Industries(NYSE: PPG) might fit the bill, and based on the share price graph the market seems to think so too. I last discussed the company in an article linked here and
back then concluded that there was some uncertainty over China. Since
then things have picked up a bit in China (at least in the industries
that PPG is focused on), and it has completed a few notable
transactions.
The industrial sector is certainly not firing on all cylinders but by looking at Alcoa’s last results
it is clear that some segments are doing better than others. However,
with a stock like Alcoa, it really is dependent on broad based
industrial output in China.
So what makes PPG different?
I have a list of reasons to like the stock:
Its exposure to automotive, aerospace and packaging has led it to outperform the industrial market this year.
The restructuring program has led to the company expanding margins with productivity improvements.
Some of its raw material costs appear to be moderating in 2013.
Even with weakness in European autos (see Alcoa) PPG managed to do relatively well thanks to its ‘good customer mix’.
The sale of its commodity chemicals business will allow it to focus on its core activities.
The acquisition of Akzo
Nobel’s US household paints division is a good move given the nascent
housing recovery and the $200 million of synergy savings that it thinks
it can generate in the next three years.
Putting these things together leads to an attractive proposition for
2013. In addition, China has been doing better recently in the sectors
that matter to PPG.
How PPG Makes its Money
Having conceptually discussed the positive tailwinds for the company,
it’s time to look at how this translates into earnings. Here is a
breakdown of its segmental earnings:
And now consider that it has more than doubled the size of its US
architectural coatings business with the purchase of Akzo Nobel US
household paints division.
For evidence of how well margins have expanded, I want to focus on the profit margins in its three largest businesses.
Note how well performance coatings and industrial coatings are expanding (don’t forget to look at them on a year on year basis).
There could be more to come with raw material costs moderating. PPG’s
management were relatively cautious over the issue, but if we go back
to Sherwin-Williams'(NYSE: SHW)
last results, it reduced its view on raw material cost inflation for
the year. Indeed, Sherwin-Williams reduced its view to flat from low
single digits previously. Titanium dioxide and propylene prices may see
some pressure as other parts of the industrial sector are not doing so
well, and since these are key inputs into PPG's cost base, I think there
is reason to be optimistic.
The Bottom Line
In conclusion this company has a lot of things going for it. It’s a
mixture of acquisition-led growth plus good exposure to the parts of the
industry that are working right now. In addition, the increases in
margin plus opportunities for synergy-driven cost savings mean that its
(already substantial) cash generation can improve in future years. For
those looking for exposure to an industrial cyclical then PPG looks to
be one of the best options.
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