It's easy to think that industrial stocks slavishly follow GDP growth or some general measure of industrial output. In many cases, that assumption proves correct. However, sometimes there are companies whose specific end markets are hitting all the sweet spots within the economy. One recent case in point: coatings and paintings products company PPG Industries (NYSE: PPG ) .
PPG Industries' favorable positioning
Investors tend to closely follow results from aluminum producer Alcoa (NYSE: AA ) because they give great color on industrial trends in the global economy. Here's Alcoa's current end market outlook; the cells in green represent where Alcoa upgraded expectations, and those in red are for downgrades.
Note that many of its end markets are in good areas of the global economy. And for PPG, that story looks even better.
Promising prospects? Good!
PPG Industries is seeing solid growth in the aerospace sector, with its performance coating segment reporting net sales growth of 10% in the third quarter. That figure's in line with what Alcoa and others are saying about a strong aerospace market.
In addition, it has managed to outperform an already strong automotive sector. PPG's industrial coatings segment increased volumes to its automotive original equipment manufacturers (OEMs) by 10% in the last quarter. Surprisingly, it noted that its automotive coatings growth saw "each major region delivering growth on a comparable scale."
Essentially, PPG finds itself well-positioned with specific European automakers that are generating growth, and it's seeing a pickup in demand from Japanese manufacturers shifting production outside Japan. Moreover, since it doesn't sell to Japanese OEMs in Japan, it isn't suffering any loss of business as a consequence of this shift.
Well-placed internationally, too
Furthermore, PPG is well-positioned geographically, with its specific end markets looking strong within their own regions of the globe. For example, the Chinese economy is shifting toward domestic consumption, and away from fixed-asset investment in areas like housing and commercial construction. PPG is strong in the Chinese automotive, aerospace and packaging sectors, but according to the company, it doesn't have as significant a presence in the architectural market.
Europe remains a challenge, but PPG reported signs of stabilization there. Moreover, partly thanks to cost-cutting measures, the company managed to increase overall European pre-tax segment earnings by 13%. Similarly, its architectural coatings-EMEA segment grew earnings by 30% to $73 million.
North American construction
PPG's performance coatings segment probably represents its greatest growth catalyst going into 2014. Unfortunately, the commercial construction market hasn't kicked in quite as strong as many had hoped so far this year. Indeed, on the conference call PPG described itself as being "more bullish on commercial construction coming into the year" than its actuall first-half performance could support.
Rival paint company Sherwin-Williams (NYSE: SHW ) told a similar story in its most recent set of results. Sherwin-Williams noted that its comparable-store growth was outpacing the US paint market by growing 7%. But while it described the US residential market as "very strong," it said the non-residential market was lagging behind. Incidentally, in common with PPG, it cited the marine market as being weak.
Going forward, both PPG and Sherwin-Williams can expect the US non-residential market to improve; historically, the commercial construction market has tended to lag residential building. Moreover, PPG's acquisition of the U.S. household paints division of Akzo Nobel appears well-timed. It added $400 million to PPG's performance coatings segment sales, and PPG has already achieved 50% of the planned $200 million in synergy benefits. There are more savings to come in 2014.
Where next for PPG Industries?
The indications from Alcoa and others are that PPG is placed in many of the right sectors of the global economy, and its momentum looks set to continue into 2014. Moreover, the stock remains at a discount to its peers.
Analysts forecast PPG's EPS growth to come in at over 15% next year . Given a stronger US commercial construction market, it's not unreasonable to think that this stock could reach $200 in the not-too-distant future.
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