We are upgrading our long-term recommendation on PPG Industries (PPG) to Outperform from Neutral. The company’s strategy of diversifying its business across various products and geographies has come in handy in difficult times of the economy.
It has trumped the Zacks Consensus Estimates over the last four quarters, which is a testimony to the fact that it has done well even when the economy was under pressure. More importantly, the company’s revenues from emerging markets grew over the last three years and constituted 27% of total revenue in 2011.
PPG Industries is focused on tapping the potential of emerging markets and acquired the coatings business of Colpisa earlier this year. The acquisition has led the company to become the only major coatings supplier to automotive original equipment manufacturers (OEMs) with a production facility in Columbia.
In addition, the company has an impressive cost cutting and restructuring strategy to boot. It expects to save 20 to 25 cents a share towards the end of the year through its restructuring measures.
However, the company’s considerable presence in the U.S. construction, European architectural and global auto, appliance and industrial coating markets leaves it vulnerable to economic headwinds. The construction market in the U.S. might exhibit lethargic growth in the near-term and affect the company’s earnings generating potential.
Moreover, PPG Industries’ operational performance is tied to raw material imports and energy. As a result, any significant change in the price of natural gas or strengthening of foreign currency against the local currency of its manufacturing facilities might have an adverse impact on results.
The company’s first-quarter 2012 adjusted net earnings (excluding one-time items) of $1.81 a share exceeded the Zacks Consensus Estimate of $1.79. Revenues jumped 6% year over year to $3,752 million, trumping the Zacks Consensus Estimate of $3,696 million.
The jump in revenues was driven by across the board improvement in the company’s coatings businesses. Its businesses were also helped by robust domestic demand along with growth in emerging regions. However, weakness in Europe pulled back some of the growth seen in the company’s businesses.
Going forward, the company anticipates that domestic growth in the second quarter will be consistent with the first quarter. It also expects rapid growth in emerging markets on the back of improved industrial activity in China. However, it expects the European market to be a sore point in the second quarter as well.
PPG competes with EI DuPont de Nemours & Co. (DD) and BASF Coatings AG and currently holds a short-term Zacks #1 Rank (Strong Buy).
Powered by Facebook Comments