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We have retained our Neutral recommendation on PPG Industries (PPG - Analyst Report) following its mixed first-quarter 2013 results. We remain on the sidelines factoring in the lingering weakness in the European market.  

Why Kept at Neutral?

The coatings giant’s profit for the quarter, reported on Apr 18, climbed manifold on strength across automotive OEM and aerospace markets. A one-time gain on sale of PPG Industries’ commodity chemicals business boosted the bottom line.

Adjusted earnings of $1.58 per share beat the Zacks Consensus Estimate of $1.56. Sales were essentially flat year over year at $3,331 million, missing the Zacks Consensus Estimate of $3,424 million. Strong momentum across North America and Asia was somewhat masked by sustained weakness in Europe.

PPG Industries has a diversified business, both in terms of products offered and geographical presence. It has a leading position in several paints and coatings end markets.

PPG Industries is taking steps to grow its business inorganically by making a number of acquisitions. It recently closed the acquisition of the North American architectural coatings business of Dutch paints company AkzoNobel, N.V. (AKZOY) for $1.05 billion. The acquisition expanded PPG Industries’ branded paint product offerings and scale in the North American architectural paint market.

PPG Industries sees mixed economic trends in 2013 with continued strength in North America, improvements in Asia and sustained weakness in Europe. The company is pursuing restructuring of its European operation, which is expected to fetch meaningful cost savings this year. PPG Industries also has an impressive record of returning cash to shareholders through dividends and share buybacks.

However, PPG Industries is expected to continue to face macroeconomic challenges going ahead. While the company had a decent first quarter, it expects continued softness in Europe and foresees a challenging demand environment in the region.

Moreover, raw material inflation and currency headwinds remain concerns for PPG Industries. Some of the key end markets such as non-residential construction, architectural coatings and electronics also remain sluggish.

PPG Industries currently holds a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the chemical industry that are worth considering include Eastman Chemical Co. (EMN - Analyst Report) and LyondellBasell Industries NV (LYB - Analyst Report) with both retaining a Zacks Rank #2 (Buy).

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