We are retaining our Neutral recommendation on PPG Industries Inc.
(PPG - Free Report
) following its mixed third-quarter 2012 results. The Pennsylvania-based company topped earnings expectations in the quarter although currency headwinds dented its sales in the quarter. It clocked adjusted earnings of $2.24 a share, beating the Zacks Consensus Estimate by 3 cents. Profit, as reported, rose 9% year over year on the back of the company’s cost-saving measures.
Revenues, however, nudged down 0.1% year over year to $3,845 million, trailing the Zacks Consensus Estimate of $3,904 million. Sales were impacted by unfavorable currency exchange translation. The company witnessed strong growth in its North American automotive OEM coatings business.
PPG Industries, which competes with the DuPont Performance Coatings segment of EI DuPont de Nemours & Co. , 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 seeing strength in the North American automotive OEM market. The company looks to grow its businesses strategically along with controlling costs. PPG Industries is also taking steps to grow its business inorganically by making a number of acquisitions.
Moreover, PPG Industries has been returning cash to its shareholders in the form of uninterrupted dividend payouts. It is also pursuing restructuring of its European operation, which is expected to fetch meaningful cost savings this year and beyond.
PPG Industries, in July 2012, announced a definitive agreement, under which, it will split its commodity chemicals unit and merge it with Georgia Gulf. The transaction, which is valued roughly $2.1 billion, is expected to consummate in early 2013. The move is expected to deliver enhanced value to PPG shareholders.
However, PPG Industries is expected to continue to face macroeconomic challenges going ahead. The company expects continued weakness in Europe, inconsistent performance in the overseas markets and softness across most of its end markets in the fourth quarter.
Moreover, raw material costs have been a matter of concern. While prices of key raw materials including titanium dioxide (TiO2) have stabilized of late, they are still higher on a year-over-year basis.
We also feel that PPG Industries’ significant presence in the U.S. construction, European architectural and industrial coating markets exposes it to substantial headwinds. Construction markets in the U.S. are expected to remain sluggish in the near future.
Our recommendation on the stock is in sync with a short-term Zacks #3 Rank (Hold).