PPG Industries Inc. (PPG) Analyst: Denise Cheresposy Spring Recommendation: BUY Target Price until (12/31/2017): $135

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1 Recommendation: BUY Target Price until (12/31/2017): $ Reasons for the Recommendation The reasons for my recommendation are based on the strength of acquisition justification, predicted economic conditions, an organizational restructuring program, and a stock repurchasing program that is currently in process As I explain the validation behind my recommendation it will demonstrate why PPG is predicted to continue to expand and produce continue growth margins within majority of their operating segments. Acquisitions Acquisitions have been a strength for PPG, they entered into several smaller acquisitions throughout 2015 but did have two larger acquisitions that were taking into consideration. These acquisitions stand out because of the increase in market share specifically in North and Central America. The first acquisition occurred in 2013 of Akzo Nobel North America architectural coatings. This purchase took place in effort to expand their North American architectural coatings and PPG is attempting to increase their domestic sales. Akzo was a smaller competitor of PPG but this acquisition has allowed PPG to increase their market share within North America and eliminate a portion of competition. PPG currently is not the largest coatings manufacturer in North America, acquiring a portion of Akzo Nobel who is a major competitor on a global stand point better positions PPG within this region. The second acquisition that took place and will have a large impact on future global sales is the purchase of Consorcio Comex S.A. de C.V. that took place in quarter 4 of Comex was the largest architectural coatings manufacturing and retailer in Central America and Mexico. Before this acquisition was completed PPG did not have any presence within Central America, this has allow them to expand their global footprint. Majority of Comex s business operations coincided closely with PPG s operations making the transition not as complex. It has just recently passed a year since the purchase was completed and within 2016 operations should be fully integrated within PPG s business operations. Both of these acquisitions strengthens PPG s position within the market. PPG expanding company and continuing growth margins comes from their acquisition they undertake. Majority of their acquisitions are of smaller local chains in certain areas and they may experience the larger investments that are mentioned above. These acquisitions help increase their presence in local markets and expand their market share. PPG is predicting their future acquisitions they foresee happening within 2016 to be to the same extent as 2015 in relation to the amount of acquisitions. They do not currently predict large acquisitions such as Comex and Akzo Nobel North America in 2016 but that can change. The reason I meant this is because future acquisition means future growth for PPG as well. They are looking to continue to expand and increase their brand awareness throughout the globe. Economic Market Conditions PPG is attempting to expand their industrial coatings business segment, specifically the OEM automotive industry. This industry is a large driver for PPG and they have suffered recently will the current market conditions across the globe. The country that has specifically impacted PPG in the OEM automotive industry is China. China is currently facing a currency devaluation which has decrease the parity purchasing power and decreased production. They are the largest OEM automotive production globally that have decreased production and sales have decreased directly pg. 1

2 affecting PPG. I expect the Yuan to slowly get stronger compared to the dollar over the next few years. The reason I say this is because China is the second largest economy in the world. They are a major exporter of goods within several different industries. Currently, China let the Yuan free float for a longer period of time than they should have. This caused the large devaluation in the Yuan to occur. As a result in the devaluation of the Yuan, PPG has seen very little growth within the industrial business segment. PPG is looking to decrease their premium line products and start offering more of the mid-line products. This is expected to keep sales in the industrial segment consistent but will benefit in the future. The reason I say this is because if China s economy doesn t recover as quickly as PPG is anticipating offering the mid-line products will keep PPG within the market in China during the low economic growth period. Also, China is imposing a large tax on solvents which benefits PPG in the long run because majority of PPG s products are water based products and will not be affected by the solvent-based tax. Dispite China s current economy struggles PPG will benefit making the adjustments to remain sustainable in the present and in the long term will see growth for their industrial business segment. Business Restructuring As result of all the latest acquisitions, PPG is in the process of restructuring the company. CEO Michael McGarry did mention in quarter 2 transcripts that majority of the restructuring expenses will occurred during A portion of the restructuring may spill into 2017 but 2016 will take the largest portion of the expense. The restructuring expense will not be a continuous expense that needs to be factored in every year. PPG is finalizing the integration of the two larger acquisitions that have taken place. Also, they just announced the current General Manager Adriana Macouzet will not become the Vice President of their Latin America Region. The business restructuring will help eliminate any duplicated processes and make the operation processes efficient for the company. Increasing efficiency helps eliminate operating expenses, which can help increase net income margins. Considering the future cost savings that PPG will experience once the restructuring process is complete their net income should increase. PPG stock price is currently sitting well above the purchase price. Taking into consideration the above predicting factors I have predicted PPG s stock price to increase to $135 per share by year-end, December 31, In 2015, PPG s EPS was $5.18 per share with a forward P/E ratio The company is currently expanding and looking to improve the efficiency within business operations. They are in a strong position within the market and are expanding their global market share. Considering these factors I recommend a strong buy because I expect the stock price to increase in Company Analysis PPG Industries Inc. (PPG) is a manufacturing and distribution company that produces architectural coatings, specialty material, and glass products. The company operates within three business segments that include; performance coatings (57.2% of sales in 2015), industrial coatings (35.7% of 1 Company s quarter 2 transcripts with call to investors 2 Data gathered from Morningstar and forecast valuation from analyst pg. 2

3 sales in 2015), and glass (7.1% of sales in 2015). PPG is an international business operation and currently operates in Europe, Middle East, Africa (EMEA), Americas (United States and Other Americas), Asia Pacific, Central America, and Mexico 3. Over the past six years PPG has undergone major changes to their business structure such as entering into acquisitions and disinvesting in a portion of their assets but overall they have managed to produce positive growth margins. In 2013 PPG restructured their organization to reflect three business segments instead of the five that were recognized previously. Combining certain portions of the business boosted growth margins for that particular year, which makes it difficult to see the breakdown of segment growth. The overall sales growth for 2013 was 6% but the company has produced growth from 2012 despite all the investments they are making. PPG is closely related to the housing market and because of this they realized a significant impact during the 2008 financial crisis. Their sales dropped 23% and stock prices decreased significantly from averaging $58.17 to reaching a low of $28.48 in the years following 4. These large decrease in sales and stock price brought realization to the amount of risk they are exposed to operating and relying heavily on one market and the impact that is sustained by the organization. This caused PPG to expand operations to other markets that will help offset the impact if one market were to fail. The company has increased their interest in the OEM automobile industry. This focus will help increase the industrial business segment for PPG and also relies on a separate market than the architectural coatings. PPG s CEO Michael McGarry had expressed in Q3 transcript call with investors he had mentioned that PPG is turning their focus to their main revenue making product and that is the different types of coatings. This will strengthen the company and allow them to become more specialized within this industry. The production expenses can be turned to produce more unique products for their industrial and performance segments. They are looking to increase both the performance and industrial coatings business segments sales revenue in the coming years. PPG wants to remain the dominant competitor within the paint manufacturing industry and strength their position in the market. The company s weakness is the glass business segment. There is a large amount of competition within this industry and PPG has not seen significant growth within this segment. The recent sale of their minority ownership in Pittsburg Glass Works was not a reassuring sign for the longevity of this portion of the company. Overall, the company is has demonstrated strong growth margins despite the collapse of the housing market in They have recovered majority of their costs and have innovated over the past couple of years. They continue to seek alternative options for growth and create brand awareness. All the recent change that has taken place within the organization has potential benefit for the company in the near future. They have learned to adapt to any economic situations that may be placed in front of them and remain sustainable. They have positioned themselves within the market as a leader both globally and domestically. 3 Information from Company s k filing 4 Data from Yahoo! Finance historical prices pg. 3

4 3. Industry Analysis PPG operates within several different industries because of the different product types they offer to companies and consumers. The main industries consist of the paint manufacturing industry, glass product industry, and last the adhesive manufacturing industry. Out of these three industries PPG is a major competitor in two of the industries which are the paint manufacturing industry and the adhesive manufacturing industry. The paint manufacturing industry includes architectural coatings, special-purpose coatings, and OEM companies. This industry has expectant continuous growth for the next 5 years until year 2021 of 1.6%. Major competitors within this market consist of PPG, Valspar, and Sherwin-Williams. Specifically this industry is where PPG conducts majority of their operations and is the largest segment within the corporation. In 2015, PPG held approximately 20.8% of the total market share and are the leading company within this industry 5. This percentage is expected to expand within the next few years with recent company investments that were made. Majority of the demand that is created within this industry comes from the housing market. This market took a major hit in 2008 but has been steadily recovering since. Majority of the competitors within this market operate on a global scale and like PPG have many other operations that make up their companies. Exports for the paint manufacturing industry for 2015 total $3.1 billion accounting for approximately 10% of the total industry revenue. The major threat to this industry is all the regulations companies must abide by such as complying with the Environmental Protection Agency (EPA). Majority of the products that are produced within this industry contain certain types of chemicals that may be damaging to the environment. The glass product manufacturing industry produces flat glass, glass containers, pressed glass, and any other products that are made from glass. Right now the glass industry is not dominant by one single company and the larger portions of the market share percentages are evenly spread out through several competitors. PPG is not a major competitor within this market and has recently decrease operations within this business segment by relinquishing an acquisition that was deeply invested in the glass industry. This industry has an expected continuous growth rate of 2% until year This industry has suffered slightly because of the amount of products that are being produced that can replace glass products. This has been a cause for the low growth rate for the industry overall. There has been industry layoffs, competition is increasing making it difficult for companies to increase their sales. This has created a potential threat for PPG and they may reconsider operating within this market because of tall the uncertainty surrounding the industry. The barriers to entry into this industry are high, it is difficult for a company to enter into this market and become sustainable and remain sustainable. The markets that directly affect this industry include the automotive industry, construction market, household appliance market, and the food and beverage market. The glass manufacturing industry is also a global industry and majority of the companies that operate within the industry have global operations. Exports were approximately $5.2 billion in 2015 which accounted for 19.9% of the industries revenue. 5 Data from IBISWorld industry information pg. 4

5 The last industry that PPG operates within is the adhesive manufacturing industry. Majority of PPG s products that relate to this industry include their specialty products. The expected continuous growth rate for this industry is 1.8 % for the next four years until This growth is dependent on the some countries economy conditions. It has potential for opportunity if the global market started to recover. PPG is considered a major player within this industry, holding approximately 7.9% of the market share. Majority of this industry s products include different types of adhesives and sealants. This industry is dependent on the automotive, construction, and aircraft manufacturing markets which have all bounced back after the 2008 financial crisis. Competition has increased within this industry because of the amount of mergers and acquisitions that have taken place. pg. 5

6 Appendix: Inputs into valuation using multiples * Analyst's own calculations. Source of basic data: company's 10-K; Yahoo! Finance Forecasted Sales Revenue * Analyst's own calculations. Source of basic data: company's 10-K; Yahoo! Finance pg. 6

7 Competitor Analysis * Source of basic data: Morningstar pg. 7

8 References Equity Multipler. (2015). Retrieved from My Accounting Course: PPG Industries. (2015, December). 8-K. Retrieved from SEC-Edgar: kx ex991.htm PPG Industries. (2015, October ). PPG Industries (PPG) CEO Michael McGarry on Q results- Earnings Call Transcript. Retrieved from Seeking Alpha: results-earnings-call-transcript?page=7 PPG Industries. (2015, September). 10-Q. Retrieved from SEC-Edgar: PPG Industries. (2016, January). 8-K Q4 and full-year results. Retrieved from SEC-Edgar: e-ex99.htm PPG Industries Inc. (2007, December). Edgar. Retrieved from SEC: PPG Industries Inc. (2011, Febrary ). Edgar. Retrieved from SEC: PPG Industries Inc. (2012, February ). Edgar. Retrieved from SEC: PPG Industries Inc. (2013, February ). Edgar. Retrieved from SEC: PPG Industries Inc. (2014, February). Edgar. Retrieved from SEC: PPG Industries Inc. (2015, 2). Edgar. Retrieved from SEC: PPG Industries Inc. (2016, 2). Edgar. Retrieved from SEC: PPG Industries Inc. (2008, December). Edgar. Retrieved from SEC : pg. 8

9 PPG Industries Inc. (2015, July). PPG Industries' (PPG) CEO Charles Bunch on Q Results-Earnings Call Transcript. Retrieved from Seeking Alpha: PPG Industries Inc. (2015, April). PPG Industries' (PPG) CEO Chuck Bunch on Q Results-Earnings Call Transcript. Retrieved from Seeking Alpha: PPG: A Dividend Growth Machine. (2016, February). Retrieved from Seeking Alpha: UNM. (2016). Morning Star. Retrieved from Investment Research Center: pg. 9