PPG Industries Inc. PPG is expected to gain from its cost-saving actions and synergies of acquisitions amid certain headwinds including soft demand due to the coronavirus pandemic.
Shares of the paints giant are down 11.4% over a year compared with its industry’s 15.2% decline.
Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
PPG Industries is taking steps to grow business through strategic acquisitions. The buyout of Whitford Worldwide in 2019 further strengthened its robust industrial coatings solutions portfolio while the Hemmelrath acquisition expanded its range of automotive coating products.
The acquisition of specialty materials maker, Dexmet Corporation, also allows the company to add value to its customers by enhancing product offerings as well as expanding R&D capabilities. The purchase of Industria Chimica Reggiana also complements the company’s current product offerings for the automotive refinish and light industrial coatings industries. Earlier this year, the company also closed the acquisition of Alpha Coating Technologies. Acquisitions are expected to contribute to the company’s sales in 2020.
Moreover, PPG Industries is actively managing costs and taking appropriate pricing actions amid a challenging business environment. It remains focused on improving its cost structure and recovering margins through price hikes.
PPG Industries achieved roughly $20 million in cost savings from its restructuring programs in the first quarter of 2020. The company, earlier this month, approved substantial restructuring actions to lower its global cost structure. The plan includes a voluntary separation program that was offered in the United States and Canada.
The company cited soft global economic conditions due to the pandemic and related recovery pace in a few end-use markets coupled with other opportunities to optimize supply-chain and functional costs.
Upon completion, PPG Industries anticipates the planned actions to offer $160-$170 million in annual pre-tax cost savings, with roughly $25-$35 million of savings predicted in 2020. Moreover, the remainder of the annual cost savings is expected to be realized by the end of 2021.
The company expects these measures to allow it to come out of the current crisis with reduced structural costs. On account of these actions along with sustained discretionary cost controls, the company anticipates strong operating margin leverage as economic activities continue to improve.
A Few Worries
PPG Industries faces challenges from muted demand across certain businesses due to coronavirus. Soft demand is expected to hurt its sales volumes in the second quarter of 2020.
The company envisions its total sales volume for the second quarter to be down 30-35%. It expects customer demand to remain significantly impacted with declines continuing in automotive original equipment manufacturer (OEM), automotive refinish and aerospace coatings businesses.
PPG Industries is witnessing a reduction in automotive OEM industry production rates. For industrial, it sees lower sales volumes across all major regions. Moreover, weaker demand due to lower miles driven is expected to hurt volumes in automotive refinish. The company also expects customer shutdowns and lower miles flown globally to hurt sales volumes in aerospace in the second quarter.
The company is also exposed to headwinds from unfavorable currency translation. Unfavorable currency swings due to the strengthening of the U.S. dollar vis-à-vis a broad range of currencies hurt its sales and earnings in the first quarter. PPG Industries expects currency translation headwinds to impact net sales by $140-$150 million in the second quarter. As such, unfavorable currency may continue to exert pressure on its sales and margins.
PPG Industries, Inc. Price and Consensus
PPG Industries, Inc. price-consensus-chart | PPG Industries, Inc. Quote
Stocks to Consider
Better-ranked stocks worth considering in the basic materials space are Agnico Eagle Mines Limited AEM, Barrick Gold Corporation GOLD and AngloGold Ashanti Limited AU.
Agnico Eagle has a projected earnings growth rate of 53.6% for the current year. The company’s shares have gained roughly 17% in a year. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Barrick Gold has a projected earnings growth rate of 65% for the current year. The company’s shares have shot up around 57% in a year. It currently has a Zacks Rank #2.
AngloGold has a projected earnings growth rate of 109.9% for the current year. The company’s shares have surged around 55% in a year. It currently has a Zacks Rank #2.
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