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Steven Cohen and Jim Simons Clash in the Paint Business

November 13, 2013 | About:
The latest report by the National Association of Realtors, made public last Nov. 10, announced expected market growth in 2014. With rent prices rising steadily, prospective homeowners have an additional incentive to buy their first house. An additional push originates in the automobile industry and rising sales of new cars. Whether the news motivated the gurus to trade PPG Industries (PPG) and Sherwin-Williams (SHW) is not certain, but their coming head to head gives us another reason to look into their prospects.

Housing Market Feeds a Successful Business Strategy

The steady recovery and growing sales of houses and cars in the U.S. and Latin America has had an impact on Sherwin-Williams, and reflected on year-over-year revenue increments helped by recent acquisitions. Its wide portfolio is divided between the Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group segments. And product offering counts with paints, coatings and related products, while operations have spread through North and South America, the Caribbean region, Europe and Asia.

Looking ahead, Sherwin-Williams faces the challenge of reducing integration costs in order to exploit the full potential enclosed by the recent acquisition of Comex’s U.S. and Canadian businesses. Improving market demand will help to ease the task while making the business a more competitive peer. Meanwhile, the Federal Competition Commission of Mexico is analyzing the acquisition of Comex’s Mexican operations. The acquisitions are part of the growth strategy based on acquisitions and internal initiatives such as efficient working capital management and innovation.

Growing automotive finishes, original equipment manufacturers product finishes and protective and marine coatings continue to strengthen future outlook. Growth prospects are reinforced by new store openings. And although the 80 to 90 new stores for 2013 will not be inaugurated, management has announced the policy will continue through 2014. Other policies that will carry on 2014 are focused on control costs, reducing capital investment, optimizing the supply chain and improve overall productivity. Most importantly, management has announced that it plans to buy an additional 13.65 million shares.

Financially, Sherwin-Williams is strong thanks to growing revenues and moderate operating margins. Currently trading at 27.1 times its trailing earnings, the stock packs a 44% premium to the industry average. Jim Simons has turned into the guru holding the largest stake in the firm through the current year. Opposite, Steven Cohen has reduced his position through the same period. I share Simons’ optimism because the business strategy acquisitions and international expansion continues to offer growth opportunities.

Restructuring Growth

PPG Industries is the world's largest producer of coatings and operations divided among six segments, with the Performance Coatings, Industrial Coatings and Architectural Coatings being the most important. The last quarterly report shows overall improvements on performance, with important increments on profits and revenues. However, restructuring costs have put a dent on performance improvements. In this case, the growth has been driven by the aerospace and automotive markets. Nonetheless, management has announced that investors should expect the seasonal slowdown in the fourth quarter.

The growth strategy for PPG Industries will continue through cost controlling policies, divestiture of non-core assets, strategic acquisitions, and internal growth. This approach is coherent with a wide product offering and strong portfolio, with a tilt towards coatings and reduction of the commoditized side of the business. In other words, the company looks to attract stickier customers and avoid exposure to the house market. The new focus the business strategy tries to print on the model is very important since a great share of profits comes from the volatile construction, housing, and automotive industries.

The international market is an important area for growth, and currently PPG Industries derives a third of its revenues from emerging regions. The benefits have been two-faced, as the firm absorbed synergies from fast-growing energies and eased the impact from economic headwinds. Improved industrial and chemical production activity will continue to drive growth in the U.S. market, but not much growth is expected from the construction industry. Additionally, management announced the shareholder rewarding program will continue.

The balance sheet for PPG Industries is strong thanks to declining debt and rising profits. Currently trading at 20.6 times its trailing earnings, the stock trades at a 9% discount to the industry average. Richard Pzena, the guru holding the largest stake in the firm reduced his position in the firm, and Steven Cohen followed suit. Jim Simons, however, during the same period raised his stake in the company. I share his optimism because management has decided to restructure the business model when volatile industries are recovering.

Jim Simons Wins

I prefer Jim Simons’ opinion to Steven Cohen in this case. Also, I like both companies but understand Sherwin-Williams offers a better entry opportunity. A greater premium and a recent stock price dropopens an interesting window for a long-term investment. Additionally, Sherwin-Williams has more room for growth, and store opening continues to move forward.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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