This Company Is Making the Right Moves to Grow Its Business
ANUP 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) is a specialty chemicals and products company that provides performance and industrial coatings. PPG sells its entire range of products through company-owned stores, home centers, paint dealers, and independent distributors, as well as directly to customers worldwide. So, the company's business is in a good position to benefit from growth in industrial and auto end-markets. This is what helped it to post decent results in the second quarter.
There was healthy momentum across North America and Asia due to the upbeat mood in the automobile sector. European markets, however, masked this momentum because of continued weakness in the market, driving demand further down though it seems to be stabilizing as far as automobile markets are concerned.
As a result, the company posted earnings of $2.47 per share in the quarter, which beat consensus estimates by $0.11. In addition to growth in Asia and North America, the company’s cost-cutting efforts also contributed to these earnings.
Revenue increased 16% year-over-year to $4.1 billion, marginally missing consensus estimates. Excellent results in the coatings segment were driven by sales gains in automotive OEM coatings, automotive refinish and aerospace. Architectural coatings were the weakest performers, primarily due to weak demand.
PPG Industries’ cash and cash equivalents moved north by 22% year-over-year to roughly $1.2 billion at the end of the quarter. Total debt decreased by 6% year-over-year to around $3.4 billion.
PPG Industries has a diversified product portfolio, exposure in all major markets, and looks to grow its businesses strategically in addition to controlling costs. However, the company faces challenges from a weak European market and a still-sluggish architectural-coatings business. PPG claims to be the number-one player in automotive coatings in North America and China.
PPG’s prospects for the remainder of 2013 and the year ahead will largely be governed by its performance within the industrial and architectural/construction end markets, and also how European markets behave. The industrial segment also covers the marine new-build market, which saw a sharp decline of 30% in the quarter. The company expects that declines will not be as sharp in the quarter ahead and things may turn around in 2014.
PPG Industries' board approved a new $102 million business restructuring program aimed at achieving cost synergies in relation to a takeover in its North American architectural coatings business. The company expects to achieve $200 million in annual synergies from the buyout within the first three years.
Management is focused on implementing cost-savings programs, and this is exemplified by one of the most encouraging aspect of PPG's results where the architectural-coatings income increased by $5 million in Europe, the Middle East and Africa (EMEA) to $69 million, despite sales declining 5%.
PPG believes in interacting with clients directly to develop specialty products, and this gives the company pricing power because for these clients, quality is more important. Also, the coatings business is less capital-intensive than its chemicals business. This should enable PPG to produce a higher ROIC as the segment becomes a larger part of its business in the future.
Sherwin-Williams (NYSE: SHW) is the clear leader in the domestic paint market. It has a rich portfolio of brands that cater to a variety of end-users, with products ranging from architectural paints to automotive and industrial coatings. However, unlike PPG, Sherwin-Williams is restricted to just coatings and paints. PPG, on the contrary, has other segments, like glass, also.
Sherwin-Williams draws leverage from its own network of over 4,000 stores worldwide. This network reduces the reliance on big-box retailers and allows it to have direct control over pricing and customer experience. This enables it to earn higher margins by selling directly to customers instead of selling exclusively through third-party retailers.
For the last reported quarter, consolidated net sales increased by 5.5% to $2.7 billion. On the earnings front, it earned $2.56 per share, which missed consensus estimates of $2.58, but it was more than year-ago quarterly earnings of $2.17 per share. On applying corrections for a settlement related to an import-duty assessment in Brazilian operations and $0.02 per-share adjustments for unfavorable currency movements, the earnings worked out to $2.46 per share.
Sherwin-Williams lacks diversification and is a coatings-only company, unlike PPG. Sherwin-Williams is witnessing a cut in earnings estimates, and none of the analysts have revised their outlook upward for the coming quarters or for fiscal 2014. Also, all estimates have declined in the past 30 days for 2013 and 2014. So the company might perform well in the current conditions of a strong auto market, but the long-term investors should choose a more diversified company and look at others in the space.
Valspar (NYSE: VAL) relies on Lowe's and other third-party retailers for selling its products. Since Valspar maintains no pricing power and switching costs are low, it has no competitive advantages. However, Valspar has a strong pipeline of new products and significant possibilities for market share gains in both its paints and coatings segments.
Valspar just recently concluded its acquisition of Italian industrial coatings manufacturer Inver Holding S.r.l. This acquisition will enable Valspar to use Inver’s strong product portfolio, leading technology, and distribution network in order to win more customers, and hence add to its top-line and earnings in the future.
The company remains committed to making meaningful investments in the world's largest industrial markets, such as China, Europe and Latin America, to propel growth. Valspar expects to gain from new customers in consumer paints, packaging, coil and wood coatings in the second half of fiscal 2013.
Not all companies are created equal and not all perform same way. One of the indicators of how these three companies are performing is ROIC, and here’s the five-year chart to show you how they've been doing:
PPG has the highest return on invested capital among its peers. The company might have missed estimates in the recent quarter, but it displayed good growth. The auto market has been performing well and PPG is seeing good strength in its end markets, so the company should do well in the future.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
ANUP SINGH 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!