Simply, PPG is all set to get bigger in the coatings industry, and North America will take over Europe, Middle East, and Africa as its primary market. Going by what research companies predict, this looks like a super move for the company. According to Koncept Analytics, architectural coatings dominates the paints and coatings industry. Research company Freedonia projects demand for paint and coatings in the U.S. to grow annually by 7.8% through 2015. It further pegs the architectural sector to lead the growth.
Once the deal is through, PPG will edge out Sherwin-Williams Company (NYSE:SHW) to emerge as the world’s biggest coatings company. Now that’s certainly worth betting on. But here comes the question every investor wants an answer to: Is PPG valued reasonably enough to warrant an investment right now?
Worth it?
This table will tell us how PPG stacks next to peers.
| Company | Trailing P/E | Forward P/E | Price/CashFlow | Dividend yield |
|---|---|---|---|---|
| PPG Industries | 22.4 | 14.8 | 11.9 | 1.7 |
| Sherwin-Williams | 27.4 | 19.7 | 19.4 | 1 |
| Valspar | 20.2 | 13.9 | 15.7 | 1.4 |
| RPM International | 24.3 | 14.9 | 12.8 | 2.9 |
Source: Morningstar, Yahoo! Finance
Looks like PPG has good steam left. At 22 times earnings, PPG is cheaper than Sherwin and RPM. On a price-to-cash-flow basis, PPG is the most attractive. Is PPG generating good cash flows which the market hasn’t factored in yet? Ah, yes. PPG has consistently generated free cash flow of over $1 billion annually since 2009. Moreover, for 2012, its cash flow topped its net income. Not many companies do that. PPG also holds $1.3 billion in cash and equivalents.
The $900 million that PPG Industries, Inc. (NYSE:PPG) will receive from the Georgia deal will finance its Akzo takeover, which is valued at $1.05 billion. So that should still leave PPG Industries, Inc. (NYSE:PPG) with a heavy war chest even after the deals conclude. It plans to continue hunting for companies in global markets while repurchasing shares worth up to $750 million this year.
PPG’s stand in the coatings business got an added fillip recently when E I Du Pont De Nemours And Co (NYSE:DD) sold off its performance coatings (auto paints) business to Carlyle Group in what was also the biggest industry deal in a decade. DuPont was just behind PPG in the car coatings business till it decided to shift focus to areas like agriculture. For PPG, that only shoves a close competitor out of the way.
Ironically, DuPont is also the top producer of key pigment titanium dioxide (TiO2) that goes into paints. With high prices of the pigment becoming a persistent pain, PPG Industries, Inc. (NYSE:PPG) is now busy brainstorming how it can lessen the proportion of TiO2 in its paint cans. Again, that would be gain for PPG but a bad hit for DuPont and other pigment makers.
Go ahead
Internal to external, PPG Industries, Inc. (NYSE:PPG) is balancing growth well. Its fourth quarter was the tenth straight with record earnings per share. As it deepens foothold and widens base in its industry, investors can expect good value. I strongly urge investors to keep PPG Industries in their radar.
The article Why You Should Consider Converting Your Shorts Into Long originally appeared on Fool.com and is written by Neha Chamaria.
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