Alcoa Inc (AA), PPG Industries, Inc. (PPG): The Best Stock in the Industrial Sector?

The story with the industrial sector in this earnings season has been that there has been great variability in performance. It is very much a sector picker’s market, and the broad based industrial plays like General Electric Company (NYSE:GE) or Alcoa Inc (NYSE:AA) have reported this theme. In short, Europe has been weak, but China has rebounded somewhat, the US is doing okay and the areas of relative strength overall are in things like housing, autos and aerospace. With this understood, is there a company with good exposure to these sectors?

PPG to the Rescue

I think PPG Industries, Inc. (NYSE:PPG) might fit the bill, and based on the share price graph the market seems to think so too. I last discussed the company in an article linked here and back then concluded that there was some uncertainty over China. Since then things have picked up a bit in China (at least in the industries that PPG Industries, Inc. (NYSE:PPG) is focused on), and it has completed a few notable transactions.

The industrial sector is certainly not firing on all cylinders but by looking at Alcoa Inc (NYSE:AA)’s last results it is clear that some segments are doing better than others. However, with a stock like Alcoa Inc (NYSE:AA), it really is dependent on broad based industrial output in China.

So what makes PPG Industries, Inc. (NYSE:PPG) different?

I have a list of reasons to like the stock:

Its exposure to automotive, aerospace and packaging has led it to outperform the industrial market this year.

The restructuring program has led to the company expanding margins with productivity improvements.

Some of its raw material costs appear to be moderating in 2013.

Even with weakness in European autos (see Alcoa Inc (NYSE:AA)) PPG managed to do relatively well thanks to its ‘good customer mix’.

The sale of its commodity chemicals business will allow it to focus on its core activities.

The acquisition of Akzo Nobel’s US household paints division is a good move given the nascent housing recovery and the $200 million of synergy savings that it thinks it can generate in the next three years.

Putting these things together leads to an attractive proposition for 2013. In addition, China has been doing better recently in the sectors that matter to PPG.

How PPG Makes its Money

Having conceptually discussed the positive tailwinds for the company, it’s time to look at how this translates into earnings. Here is a breakdown of its segmental earnings:

And now consider that it has more than doubled the size of its US architectural coatings business with the purchase of Akzo Nobel US household paints division.

For evidence of how well margins have expanded, I want to focus on the profit margins in its three largest businesses.

Note how well performance coatings and industrial coatings are expanding (don’t forget to look at them on a year on year basis).

There could be more to come with raw material costs moderating. PPG Industries, Inc. (NYSE:PPG)’s management were relatively cautious over the issue, but if we go back to Sherwin-Williams Company (NYSE:SHW) last results, it reduced its view on raw material cost inflation for the year. Indeed, Sherwin-Williams Company (NYSE:SHW) reduced its view to flat from low single digits previously. Titanium dioxide and propylene prices may see some pressure as other parts of the industrial sector are not doing so well, and since these are key inputs into PPG Industries, Inc. (NYSE:PPG)’s cost base, I think there is reason to be optimistic.

The Bottom Line

In conclusion this company has a lot of things going for it. It’s a mixture of acquisition-led growth plus good exposure to the parts of the industry that are working right now. In addition, the increases in margin plus opportunities for synergy-driven cost savings mean that its (already substantial) cash generation can improve in future years. For those looking for exposure to an industrial cyclical then PPG Industries, Inc. (NYSE:PPG) looks to be one of the best options.

The article The Best Stock in the Industrial Sector? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!