Tale of Two Colors: Which One Should Your Portfolio Wear This Year?

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The chemicals sector has started 2013 on a high note, with two companies in particular raising the bar for others through great numbers and frantic growth moves. RPM International (NYSE: RPM) and PPG Industries (NYSE: PPG) have stunned the Street with their solid stock returns in recent months.

So which one will walk away with the top performer crown in 2013? Or is someone else warming up to whizz past the two?

Numbers you should know

RPM’s last quarter net income improved 17% year-on-year. Sterling growth of 19% for its consumer business was the highlight of the quarter. Acquisitions added around 13% to the growth. The Builder-confidence index continues to inch higher. The third-largest homebuilder in the United States, Lennar (NYSE: LEN) just cemented improving homebuilding sentiment by reporting a solid 32% jump each in new orders and deliveries for its fourth quarter.  Its backlog value (indicating future potential revenue) more than doubled. But housing is not what RPM is building its future upon. It prefers industrial growth over the consumer business – a strategy that’s working just fine. Its industrial segment reported decent 8% growth in the past quarter.

PPG’s last quarter was comparatively damp, with sales and profits ending 3% and 10% higher, respectively, from the year-ago quarter. PPG’s two largest segments, industrial coatings and performance coatings, reported 9% and 1% growth in sales, respectively. These businesses cater to industries ranging from automotive to aerospace to packaging.

While PPG’s numbers were in line with analyst estimates, RPM missed it on the top line. The question now is: What should an investor expect from these chemical companies going forward? What will fuel growth for the rest of the year? Most important, are they worth betting on at current prices?

Well-deserved premiums

Stocks of both companies bumped up nicely post results, stretching their long leg of gains a little more. The result: PPG has gained a mind-boggling 58% over the past one year, and RPM a handsome 29% during the same period. Does that mean these stocks are headed for a soft landing now? Not necessary.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Trailing P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Price/Cash Flow</strong></td> <td><strong>Dividend yield</strong></td> </tr> <tr> <td>RPM International</td> <td>24.7</td> <td>15.4</td> <td>13</td> <td>2.8%</td> </tr> <tr> <td>PPG Industries</td> <td>23.6</td> <td>16.2</td> <td>13</td> <td>1.7%</td> </tr> <tr> <td><strong><span>Sherwin-Williams </span></strong><span><span class="ticker" data-id="205418">(NYSE: <a href="http://caps.fool.com/Ticker/SHW.aspx">SHW</a>)</span></span></td> <td>29.3</td> <td>21.8</td> <td>19.7</td> <td>1%</td> </tr> <tr> <td><strong><span>Valspar </span></strong><span><span class="ticker" data-id="205987">(NYSE: <a href="http://caps.fool.com/Ticker/VAL.aspx">VAL</a>)</span></span></td> <td>21.6</td> <td>15.2</td> <td>18.1</td> <td>1.3%</td> </tr> </tbody> </table>

Source: Morningstar

Take a close look at the table above. Both RPM and PPG have strikingly similar valuations, but RPM scores brownie points because it pays out much more to shareholders than peers. -- delectable dividend yield of near 3% sourcing from a handsome 68% payout. Sherwin continues to be the most expensive stock in the group, and Valspar’s high P/CF ratio and low dividend yield leave much to be desired. Though it’s worth mentioning that Valspar has consistently raised its dividend for 30 years.

The sharp drop in PPG’s and RPM’s forward P/E suggests that the market expects them to grow substantially in the near future. In simple words, these stocks could still have good upside left. So what are the two companies doing right that underlines the optimism?

1+1=3

RPM is pretty bullish about 2013, having laid on the table projections of 8% to 10% growth in top line and 9% to 12% growth in profits for the full year. The key will be expanding its base through acquisitions. To make sure it hits $5 billion sales by 2015, RPM acquired two more companies last quarter after adding six during the last fiscal year (ending May). Some of these, such as Brazil-based Viapol, could turn out to be a trump card giving RPM a solid foothold in high-potential markets like Latin America. You can expect more coming this year.

PPG’s goal is a different ballgame altogether – while RPM is getting bigger overseas, PPG is set to grab a bigger share of the North American pie through its acquisition of AkzoNobel’s architectural coatings business in a billion-dollar deal. What does that leave investors with? Lots of goodies. They’ll soon become investors of the world’s biggest coatings company. Yes, PPG will surpass Akzo and Sherwin to take the top spot once the deal is through over the next few months. All this, while it returns more value to shareholders: Flush with $2 billion in cash & equivalents and over $1 billion free cash flow, PPG will buy back shares worth up to $750 million this year. The cash is flowing in from smart cost-cutting and restructuring efforts that include spinning off its commodity chemicals business to merge it with Georgia Gulf.

Colors that should look good on you

Both companies are huge growth stories that will only magnify as housing, construction and industries like auto and aerospace gather steam. Having a strong presence in the industrial construction area is a huge positive to play on while consumer housing springs back to life. RPM is looking at a record fiscal 2013 and PPG will primarily focus on “profitably growing the company and creating additional shareholder value” this year. Considering that PPG earned record earnings in 2012, it could also be headed to another record year like RPM. Both deserve your attention, and a place on your personalized stock watchlist.

Click here to add RPM International.

Click here to add PPG Industries.


Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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