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Why I Would Buy PPG Industries

Victor Selva

Victor Selva

9 followers

PPG Industries Inc. (PPG) is a global supplier of paints, coatings, optical products, specialty materials, glass and fiber glass.

In this article, I'll take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Diversified Business

PPG Industries derived nearly a third of its revenues from emerging markets. In 2012, Sales in Latin America, Asia Pacific, Eastern Europe, the Middle East and Africa accounted for 27% of the total. Growth in these fast growing regions minimizes the risks associated with a specific geographical region, lowering the impact of economic headwinds faced by in a particular region or market.

Strategic Acquisitions

In January 2013, PPG has completed the sale of its $2.5 billion commodity chemicals business to Georgia Gulf. The agreement resulted in the formation of a new company that was renamed Axiall Corp. On April 2013, PPG finalized the acquisition of the North American architectural coatings business of Akzo Nobel N.V., Amsterdam, for $1.05 billion. This was the second-largest acquisition in the company's history with expected synergies at around $200 million within the first three years. The deal will extend PPG's architectural coatings business in the United States, Canada and the Caribbean. Product offerings are now available in more than 15,000 outlets across North America. Moreover, PPG Industries has acquired specific assets of privately-held specialty coatings company Deft Incorporated. The acquisition enhances the coatings capabilities of PPG’s aerospace business.

Dividend & Share Repurchases

Looking at the financials, the company has a strong balance sheet: good cash that allows the company to hike its dividend payout to $0.61 per share ($2.44 per share annualized), reflecting a dividend yield of 1.28%. Furthermore, last year the company repurchased up to $1 billion of the company’s common stock.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a Zacks Rank # 1–Strong Buy, Methanex Corporation (MEOH) could be the option.

Relative Valuation, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 8.8x, trading at a discount compared to the industry mean. Earnings per share (EPS) has increased by 44.71% in the most recent quarter compared to the same quarter a year ago, $1.78 per share for the fourth quarter. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance as well as EPS had an upward trend over the last five years.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strenght within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

PPG

PPG Industries Inc.

65.51

MEOH

Methanex Corporation

19.86

AIQUY

Air Liquide SA

15.41

AKZOY

Akzo Nobel NV

-29.48

CBT

Cabot Corporation

7.84

CE

Celanese Corporation

21.5

HUN

Huntsman Corporation

6.46

KRO

Kronos Worldwide, Inc

-10.91

OLN

Olin Corporation

16.22

The company has an extremely good ratio of 65.51% which is higher than the ones registered by all others comps.

Final Comment

The company aims to achieve more consistent earnings growth by improving its mix of businesses through expanding its international markets and strategic acquisitions. Additionally, the company has a rich history of raising dividends, 42 years of dividend increase. For these reasons, I feel bullish on PPG Industries.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Mario Gabelli (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have taken long positions on it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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