Solid performance
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, Inc. (NYSE:PPG)’ 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.
Prospects
PPG Industries, Inc. (NYSE:PPG) 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 Industries, Inc. (NYSE: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, Inc. (NYSE:PPG)‘ 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 Industries, Inc. (NYSE: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.
Competitors
Sherwin-Williams Company (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 Company (NYSE:SHW) is restricted to just coatings and paints. PPG, on the contrary, has other segments, like glass, also.
Sherwin-Williams Company (NYSE:SHW) 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 Company (NYSE:SHW) lacks diversification and is a coatings-only company, unlike PPG. Sherwin-Williams Company (NYSE:SHW) 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.
The Valspar Corporation (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.
The Valspar Corporation (NYSE:VAL) 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. The Valspar Corporation (NYSE:VAL) 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 Return on Invested Capital data by YCharts
Conclusion
PPG Industries, Inc. (NYSE: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 article This Company Is Making the Right Moves to Grow Its Business originally appeared on Fool.com and is written by ANUP SINGH.
ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. ANUP is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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