Having been around since 1833, PPG Industries (PPG) created a diverse portfolio and international footprint. Activities are currently divided into six segments: Performance Coatings, Industrial Coatings, Architectural Coatings, Optical and Specialty Materials, Commodity Chemicals and Glass. And the company is present in North America, Europe, the Middle East, Asia, Latin America and Africa. Moreover, its size and market positioning guarantee the firm a small economic moat.
Profitability is well above the industry average, with stable prospects for growth after a full-year of exponential expansion. However, several indicators begin to show the closure of the purchasing window after heavy trading during 2013. Most important, the stock's face value has skyrocketed and taking a strong position implies a great disbursement of cash. The analysis of growth prospects is all the more interesting.
A Perfect Year All Around
For fiscal year 2013, PPG Industries reported that increased net sales translated into adjusted earnings and dividends per share rises. The rise has represented not only a year-over-year improvement, but a recovery of the lost ground during 2012 and an overtaking of the financial indicators for 2011. Most importantly, debt levels remained stable while free cash levels and operating margins increased amid a decline in overall cash flow. So far, the Performance Coatings is the segment most responsible for the latest expansion, and more is expected from aerospace coatings.
Most important, as expected, the first quarter of fiscal year 2014 recorded further growth for PPG Industries. A 17% increase in net sales, 40% rise on diluted earnings and 39% growth in Europe were reported when compared year over year, in addition to a total investment of $3.0 billion. As expected, growth was mostly driven by the Performance Coatings segments, closely followed by Industrial Coatings, reporting $429 million and $89 million, or 27% and 7% increases, respectively. Another segment recording important growth is the Glass segment, with $10 million or 4 percent growth in the same quarter year over year.
Growth prospects for PPG Industries lie on the introduction of new products. For the same reason successful research and development is the key to unlocking further growth. Most recently, the company has been awarded $224 million to develop by the US Department of Energy. But the advanced technology held by the company’s portfolio is the qualification of a new chromate-free wash primer coatings system to SAE International’s Aerospace Material Specification 3095 for airline exterior paint.
Filling the Silhouette
Peter Lynch would not recommend acquiring the stock because of the high face value. Also, the stock trades at 28 times its trailing earnings, carrying a 65% premium to the industry average. Most important, performance seems to have reached a growth ceiling during the last three years. Hence, it is not a surprise to see revenue growth for the same period ranking well below the industry average. Consequently, the business model may be closing in to exhaustion.
PPG Industries is also exposed to headwinds through its significant presence in the U.S. construction, European architectural, global appliance and industrial coating markets. Also, rising raw materials and energy costs have negatively affected overall performance. That is said to be responsible for most of the stagnation in growth and unstable overall performance recorded since 2011. Additional difficulties arise from weak economic activity in Western Europe and unfavorable currency exchanges.
The mentioned difficulties faced by PPG Industries support the ambiguous positions taken by gurus on the stock. For example, Technology Renaissance purchased the stock during the first quarter of 2013 and reduced it considerably by the end of the same year. Richard Pzena (Trades, Portfolio), the largest shareholder, has also steadily reduced his position since 2011. Both gurus make a strong statement about the company’s moment. It is recommended to wait for the next purchasing window opportunity, or business model remodeling.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.