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From the Survey: PPG
PPG Industries (PPG) is a widely recognized performance and industrial coatings company. Founded in 1883 as a plate glass company titled Pittsburgh Plate Glass, it eventually changed its name to PPG in the late 1960s, as its plate production techniques had essentially grown obsolete. Indeed, it still carries that moniker today, although now the glass segment only accounts for about 7% of revenue.
In 1900, PPG acquired Patton Paint Company, enticed by the fact that both paint and glass products reach customers through many of the same distribution channels. The company established its global footprint early on, when it acquired a Belgian glass plant early in the century, making it one of the first U.S. companies to enter the European market. Throughout the decades, PPG has had an instrumental role in introducing many surface coating technologies still commonly in use. This is embodied by its clever slogan, “Bringing innovation to the surface.” Many of us will come into direct contact with a PPG affected surface every single day of our lives, often without giving it much thought.
PPG is still headquartered in Pittsburgh, PA, however, its reach is particularly diverse globally, operating in nearly 70 countries around the world. Aside from glass, PPG reports revenues from Optical & Specialty materials, and three separate coatings segments: Performance, Industrial, and Architectural EMEA. Recently, it has been expanding through M&A. Previously second in market share only to Akzo Nobel, it procured that company’s North American business operations last year, while simultaneously inheriting the distinction of calling itself the largest coatings company in the world.
The global recovery has been rewarding for PPG. The stock, which held up better than the average equity during the latest recession, is up over 500% from its 2009 low. Lately, earnings and share price gains have accelerated. Present industry trends indicate global demand is continuing to improve, or at worst remain consistent in every major geography. The depressed European markets may have finally bottomed out, where nine consecutive slumping quarters were finally halted by flat sales in the most recent interim. Organic growth looks healthiest and most attractive for end markets in the U.S., which augurs well because, domestic revenues still account for 43% of its total, despite its scale. Of course, with its vast geographic mix, PPG is in a strong position to benefit from global economic growth, too.
The divestiture of its commodity chemicals business early in 2013 denoted a milestone in the secular shift of its portfolio. The value-added proprietary chemicals it chiefly promotes can provide distinct, marketable advantages for its customers. Year-over-year revenue was lower in 2013, but that is mostly owing to the business separation. Also, at this point in time, PPG has already “replaced” the earnings absent as a result of the sale. Later this year, PPG will sell Transitions Optical, pending customary closing conditions.
Typical annual research and development expense run around 3% of sales. Much of this spending supports new coatings and materials innovation, and this in turn, leads to increased product adoption and incremental share gains in extended end markets. As one example, while the company’s coatings are used on the exterior of many consumer food and beverage containers, it as of yet has virtually no stake in coatings used on the interior of containers. Producers will be encouraged to implement non-BPA coatings for food-touching interiors due to increasing consumer and FDA concerns, and potential legislation somewhere down the road. As this happens, PPG has an opportunity to capture new avenues. Any win, whether it be soda, beer, or soup, would potentially add another long-lasting revenue stream.
Acquisitions remain a favored method of capital deployment. Lately, share repurchases have also consumed large sums of cash, $1 billion in 2013. As no significant amount of debt is due presently, we doubt PPG will adjust its leverage for the time being. Also, with ample cash on the balance sheet, another acquisition would likely not require taking on more debt. Since its acquisition philosophy is heavily valuation based, don’t expect the company to reach too far for an opportunity if it isn’t available at the right price. Management practices financial conservatism and is willing to lose a bid if value is not apparent. Because of this, if no M&A fits its criteria, management expects to intensify its share buybacks.
PPG has a long-standing tradition of increasing annual dividends, though as of this writing the payout is not noteworthy. In fact, because of the shares’ two-year long rally, the yield is currently much lower than the company’s historical distributions.
All told, PPG is a solid long-term investment for more conservative accounts. A rising dividend payment is enough to put this on the radar for some investors. Decent growth prospects may interest others. Most importantly, perhaps, is the safety inherent in the issue via geographic and end-market diversity. The company is less tied to economic cycles, and there is an ongoing need for the coatings it produces. For more information on PPG’s prospects, investors are encouraged to check out our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.