Consider it overspray from the deteriorating economy. Coatings manufacturer PPG Industries (NYSE:PPG) reported fourth-quarter net income that was down 64% to $71 million, or $0.43 per share, on revenue of $3.2 billion. While sales were about 3% higher than the year-ago period, the increase was due primarily to its acquisition of SigmaKalon, a manufacturer of protective and marine coatings.
The somber hue over such results is an unfortunately common one. With the auto and housing markets in the tank, upstream businesses are looking like graffiti vandals tagged them. Even Johnson Controls (NYSE:JCI), which provides HVAC systems for homes and offices, along with automotive batteries, has felt the effects of the tag-team industry wreckage, reporting lower sales and losses for the first time in 16 years.
These results are also not much different from what Sherwin-Williams (NYSE:SHW) has said it expects. It will be reporting earnings later this week and is anticipating declines in the mid- to upper-single-digit range, although it expects overall revenue to remain flat at around $8 billion. The paint maker is expecting to ride out the recession through a combination of cost-cutting measures, market-share gains, and overseas profit growth. It is also planning on raising its dividend for the 31st consecutive year.
A thin veneer
According to the U.S. government, the domestic coating market is expected to contract 12% this year, and PPG saw evidence of that. Its industrial coatings segment -- which makes coatings for the automotive market -- fell 18% in the quarter. Its performance coatings segment was only able to post gains as a result of the SigmaKalon acquisition. Even where PPG was able to increase prices, performance was stripped because of lower volumes.
Management also didn't have many rosy colors available for 2009, with company Chairman Don Bunch saying that much of the first half of the year looked bleak: "Our early read on 2009 is that the first quarter and possibly the first half of the year is shaping up to be an even greater challenge than the fourth quarter 2008 due to further weakening demand."
A dash of cadmium yellow
Although not all of PPG's palette contains colors out of Picasso's blue period -- after all, it ended the year with $1 billion in the bank and increased its dividend back in October -- the coatings specialist is striving to conserve cash.
There's no hint the dividend's not safe now, but its pension plan obligations are underfunded, and it expects that as a result of poor investment returns, it will have to make payments in 2009 that are well in excess of the $50 million in payments it made in 2008. The analysts at Credit Suisse figure pension costs will more than double this year, but management says there's no problem, as it has plenty of cash on hand.
Matte or gloss finish?
With PPG, Sherwin-Williams, and even Valspar (NYSE:VAL) selling their brands through mass distribution markets like Wal-Mart Stores (NYSE:WMT), Home Depot (NYSE:HD), and Lowe's (NYSE:LOW), they're all going to be exposed to the depressed housing market. But only PPG has to contend with autos in such breadth, and with the market still valuing it like its rivals, investors might not be painting it black any time soon.
