The Dow Chemical Company (DOW), PPG Industries, Inc. (PPG): There Are Better Ways to Play the Chemical Sector

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Also earlier this year in April, PPG Industries, Inc. (NYSE:PPG) acquired the North American architectural coatings business of Akzo Nobel for $1.05 billion. The business has annual revenues of around $1.5 billion and significantly expands PPG’s architectural coatings footprint. The acquisition should also result in some cost savings due to the efficiency that is to be expected one the new business becomes fully integrated with PPG’s existing infrastructure.

The numbers

PPG Industries, Inc. (NYSE:PPG) trades for 19.7 times the current fiscal year’s estimated earnings, which seems a bit high to me. While the company is projected to grow its earnings at a relatively high rate going forward, the company does have an above-average debt level, and its profit margins are very dependent on raw materials costs, which can fluctuate significantly. The consensus of analysts covering the company project a 3-year average forward earnings growth rate of 8.5%, which doesn’t justify the current pricing in my opinion. Additionally, PPG’s dividend yield of just 1.6% is sub-par, especially for those who view income as a priority when investing.

Other chemical giants: Dow and DuPont

There are many choices in the chemical business, but let’s take a look at two of the leaders in the sector to see if we can find a better deal, or if all chemical companies are a bit on the expensive side.

Dow Chemical is the largest U.S. chemical company with an extremely diverse assortment of coatings, plastics, agricultural products, and energy products. In my opinion, Dow is a tremendous bargain right now at just 14.6 times current year earnings, and the company is projected to grow its earnings by 23% and 19.5% during the next two years. While Dow does have a debt issue as well, the valuation still looks extremely attractive, as does Dow’s 3.8% dividend yield which is sure to attract income-seekers.

DuPont is the second largest U.S. chemical company and is just as diversified in its product offerings as Dow. DuPont is the “cheapest” of the three companies mentioned at 13.9 times current year earnings, which are projected to grow at 12% annually going forward. DuPont is also a good income stock, with a 3.42% yield that has never been cut, something Dow can’t claim.

Buy, Sell, or Hold?

So, it looks like the expensive valuation is not widespread across the chemical sector. PPG Industries, Inc. (NYSE:PPG) is a bit overpriced at the current level, and I would need either a significant pullback or some upside surprise in their next quarterly report before I would be a buyer. In the meantime, either of the other two companies mentioned would make an excellent long-term play on the chemical sector, with my preference going to Dow due to its dividend and impressive growth rate.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article There Are Better Ways to Play the Chemical Sector originally appeared on Fool.com.

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