We are downgrading our recommendation on
PPG Industries Inc.
) to Neutral factoring in the challenges the company is expected to
face in the second half of 2012.
The Pennsylvania-based company racked up record earnings in
second-quarter 2012 despite lower sales. It logged adjusted
earnings of $2.36 a share, matching the Zacks Consensus Estimate.
Revenues, however, fell 0.8% year over year to $3,955 million, and
also missed the Zacks Consensus Estimate of $4,153 million.
Unfavorable currency exchange translation weighed on the top line
in the quarter. Strong internal growth in domestic market was
somewhat offset by weakness in Europe.
PPG Industries, which competes with the DuPont Performance Coatings
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. The company looks to grow its
businesses strategically along with controlling costs.
Moreover, PPG Industries has a strong cash position, and continues
to utilize cash on earnings growth initiatives. The company has
been returning cash to its shareholders in the form of
uninterrupted dividend payouts. It has also initiated restructuring
measures, especially in its European operation, which is expected
to fetch cost savings in the back half of 2012.
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 late 2012 or early 2013. The
move is expected to deliver enhanced value to PPG shareholders.
However, raw material costs have been a matter of concern. Although
raw material costs have shown a moderating trend, the price of the
company's primary raw material TiO2 has been escalating. The
company expects raw material inflation to continue to weigh on its
results in the second half of 2012.
PPG Industries is expected to continue to face macroeconomic
challenges going ahead. The company expects continued softness in
the European market and foresees inconsistent growth in North
America and Asia.
We also feel that PPG Industries' significant presence in the U.S.
construction, European architectural and global auto, appliance and
industrial coating markets exposes it to substantial headwinds.
Our recommendation on the stock is in tandem with a short-term
Zacks #3 Rank (Hold).
DU PONT (EI) DE (DD): Free Stock Analysis
PPG INDS INC (PPG): Free Stock Analysis Report
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