PPG Industries: Fourth Quarter 2012 Earnings Review
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
PPG Industries (NYSE: PPG) recently released its quarterly earnings report for the fourth quarter ending December 31, 2012. At that time, analysts working on this company had the following things to consider:
- Consensus earnings per share forecast of 18 analysts, which was projected to as quarterly EPS of $1.53.
- The fact that in the last four quarterly results since quarter ending December 2011, PPG had met analyst forecasts once and beat it three times. On all three occasions, the surprise amount was been between 1 and 2% of the consensus forecast. The $1.53 EPS being forecast this time represented an increase of 17.69% over the same quarter prior year.
- It is a dividend paying company with a dividend yield of 1.66% and a fairly large company with a market cap of $21.79 billion. At current market price of $142.10, its current P/E ratio is 23.74.
The following information was also available at the company’s website.
- Net income attributable to PPG in the quarter ending June 30, 2012 was $262 million, an increase of $22 million over the quarter ending June 30, 2011.
- Comparable figures for quarters ending September 30, 2012 and September 30, 2011 showed an almost similar increase of $28 million.
- Sales during quarter ending September 20, 2012 increased by $81 million.
- In light of the acquisition made by PPG in June. 2011, its total current liabilities increased by $702 million due to debt issuance of $400 million in July 2012.
- Any further issuance of debt, if any, in regard to the latest acquisition of Colpisa Colombiana de Pinturas and its affiliate, Colpisa Equador will reflect only in the yet-to-be- released fourth quarter results.
Along with other analysts, two other factors that I mulled over were:
- Forecast earnings growth rate for December 2013, which was projected by analysts as -1.82% and annual average growth rate projection of 8.63% for the next five years. (The projection for December 2013 has been changed after declaration of results to -1.02%)
- In the nine trading days of 2013, the stock had appreciated 4.99%. Additionally, the stock has performed extremely well over the last few years –risen by 67.65% since January 2011 and more than doubled in five years.
Based on the above information, I had concluded that the stock was overvalued and there did not seem to be much in the stock for traders and investors looking for quick profits because in my opinion
- the current market price of PPG had already discounted the earnings forecast, and
- the negative P/E growth forecast of -1.83% for December 2013 did not justify the current PE ratio of 23.74
Now, the Actual Results
The results have been more or less in line with what the analysts had predicted.
There has been an increase in revenue – up from $3.52 billion in the fourth quarter prior year to $3.65 billion in the quarter under review. The net profit also jumped by $11 million to $227 million, which translates into an EPS of $1.46. Although this is 7 cents more than the fourth quarter prior year, it is lower than the market expectation of $1.53.
PPG is a global supplier in the coatings and specialty products with customers in industrial, transportation, consumer products and construction markets. The company operates in six segments:
- Performance Coatings
- Industrial Coatings
- Architectural Coatings-EMEA (Europe, Middle East and Africa)
- Optical and Specialty Materials
- Commodity Chemicals
The first three segments are engaged in the supply of protective and decorative finishes for industrial equipment, appliances and packaging, marine and aircraft equipment, automotive original equipment, factory-finished aluminum extrusions and steel and aluminum coils and other industrial and consumer products. The Optical and Specialty Materials segment is engaged in the business of optical products and silicas. The Commodity Chemicals segment produces and supplies basic chemicals and the Glass segment produces flat glass and continuous-strand fiber glass.
The company acquired Ducol Coatings South Africa (PTY) Ltd. in June 2011 and Spraylat Corp. in December 2012. In January this year, the glass segment completed the transactions relating to the purchase of the coatings businesses of Colpisa Colombiana de Pinturas and its affiliate, Colpisa Equador.
On December 27, 2012, PPG announced that the commencement of transactions relating to the split-off if its Commodity Chemicals segment. Eagle Spinco Inc., a wholly-owned subsidiary of PPG, along with a subsidiary of Georgia Gulf Corporation will own nearly all the assets and liabilities of Commodity Chemicals segment of PPG.
Going forward, the factors to consider are:
- The lower than expected EPS is attributed to the 7 cents per-share cost relating to the split-off of Commodity Chemicals segment and other acquisitions.
- The wide spectrum of industries across which the company operates works as insurance against lack of demand in any one specific market.
- PPG has a record of uninterrupted dividends. The annual dividend payout of $2.36. at current market price translates into a 1.66% return on investment.
The PPG stock lost 2.09% in three trading days after results were declared. This is more or less proves right my inference that the market had already factored in the earnings forecast.
I would suggest investors looking for a steady dividend income and long term appreciation to consider creating a systematic plan for accumulating the stock. Considering that the earnings are expected to grow at a healthy 12%% in 2014, it can prove to be a good long-term investment for those who buy at lower levels. However, the current P/E of 22.98 is still on the higher side. Although, I think that there is a possibility of the stock slipping another 1-2% in the coming days, you may start buying at current market price and continue buying at every dip.
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