With recent gains in economic activity in the U.S. as well in other developed and emerging economies around the world and the housing rebound in the U.S., the demand for paint and coatings products should rise. Also, it will not be a surprise if a strategic buyer or a private equity firm acquires one or more of the major painting and coatings companies. For example, Blackstone (BX) acquired home security and automation company Vivint in the second half of 2012 and later it announced that the company is buying wholesale foreclosed single family homes. Clearly, a paint manufacturing company makes sense when you buy thousands of homes and plan to renovate and rent them.
Three companies that investors could consider and that offer exposure to the painting and coatings industry include PPG Industries (PPG), RPM International (RPM) and Sherwin-Williams (SHW). These three companies appear fully valued and risks from higher inflation, recent acquisition and a still uncertain economic climate could drive their shares down. However, a strategic or financial buyer will have to pay a significant premium to their current stock prices. Let's take a closer look at some important valuation and fundamental metrics and which company offers the best prospects.
Basic fundamentals and valuation metrics
PPG, RPM and Sherwin-Williams have 142.9 million, 132.4 million and 103.3 million shares outstanding for a market capitalization of $20.2 billion, $4.2 billion and $17.5 billion, respectively. Below is a table comparing some of their valuation and fundamental metrics to that of the S&P 500.
Enterprise value [EV]
PE to growth
Int'l revenues (latest fiscal year)
One year total return
Source: Capital IQ, Thomson Reuters, SEC filings, author's calculations. EBITDA - earnings before interest tax, depreciation, and amortization; CFO - cash flow from operations; all data as of Mar. 17, 2013, unless indicated otherwise.
As seen from above table, all three companies are overvalued compared to the S&P 500 and also have handily outperformed the S&P 500 return during the past year. RPM seems like the company that has the most attractive valuation, however, it is the riskiest as it has the largest amount of debt as a portion of its market capitalization. Also, it derives over 40% of its revenues from international sources and has the highest beta. All this means that the company is risky but offers good upside potential.
In addition, to a higher level of debt, which is partially explained by RPM's acquiring a number of other companies in 2012, the company is well diversified as it offers a variety of products to consumers and commercial customers. For the three months ending November 30, 2012 its industrial segment generated 68% of revenues and the consumer segment the remaining 32%. The consumer segment is performing well due to improvements in the housing market in the U.S. and contributions from recent acquisitions such as HiChem (automotive paint and refinishing), Synta (deck coatings), and Kirker (nail polish enamel). And the industrial segment is doing strong in waterproofing, sealant, construction chemical, and high-performance coatings, weaker than expected in roofing, and benefiting from the recent Viapol acquisition (Brazilian building materials company). Some tailwinds in addition to acquisitions include improvements in operations, stabilizing prices of raw materials, and weather related spikes in demand.
In terms of businesses, PPG industries has six segments including 1) performance coatings, 2) industrial coatings, 3) architectural coatings (only in Europe, Middle East and Africa), 4) optical and specialty materials, 5) commodity materials and 6) glass, which contributed 32.9%, 26.1%, 6.4%, 15.4%, 16.4% and 2.8%, respectively, to earnings before interest, tax, and non-recurring items. Optical and specialty materials and commodity materials segments are particularly strong as they contributed 31.8% to earnings (15.4%+16.4%) but their combined sales were 19% of the company's net sales. PPG recently completed the process of spinning-off into Axiall (AXLL) its commodity chemicals business, which should streamline operations and free more liquidity.
While RPM is optimistic about inflation, PPG sees more headwinds due to inflation. For example, it expects propylene and ethylene prices to continue to rise with less pressure on the non-organic side of raw materials. On the positive side, PPG expects to see benefits from stabilization in titanium dioxide (a widely used white pigment) prices on the inflation front. Operationally, the company expects to benefit from higher construction activity in the U.S., strong demand for coatings in auto, airplane and other heavy industries in the Americas and Asia, and cost reduction following its restructuring in 2012.
Its recent acquisition of Akzo business in North America for $1.05 billion will contribute to 2013 top- and bottom-line results and has made the company number one or two leader in every market for coatings. Also, PPG has about $2.4 billion in cash while it needs about $500 million for its operations. A share buyback (currently planned between $500 to $700 million in the second half of 2013), a strategic acquisition(s), and/or an increase in the dividend bode well for PPG stock price.
Finally, Sherwin-Williams has four reporting segments including paint stores, consumer group, global finishes group, and Latin America coatings generating $5.4 billion ($862 million segment profit), $1.3 billion ($216 million profit), $2 billion ($147 million profit), and $0.84 billion ($81 million profit) in sales in 2012, respectively. The four major segments have the following characteristics:
Paint stores includes stores in the U.S., Canada and the Caribbean,
The consumer group sells paint, coatings, and related products in North America and some European markets through third party retailers,
Global finishes group includes original equipment manufacturer product finishes, protective and marine coatings, and automotive finishes, and
Latin America coatings is a major supplier of architectural paints in this region.
Sherwin-Williams is cautious about inflation but it believes the company can overcome slightly higher raw material prices in 2013 with higher volumes. The company should also benefit from acquisitions (Jiangsu Pulanna coatings of China and COMEX, which is the largest manufacturer and distributor of paint in North America) and growth in its stores. Also, there are 16.5 million shares remaining for repurchase as of Jan. 2013. On the negative side, the consumer group could continue to be weak due to consolidation in the industry and many large stores relying increasingly on their own brands of paint and coatings.
Major brands and recent acquisitions:
Industrial: Tremco, Alumanation, Paraseal, illbruck, Vulkem, Dymeric, Carboline, Plasite, Mathys, Stonhard, Flowcrete, API, Duracon, Fibergrate, Euco, Universal Sealants Consumer:Rust-Oleum, Stops-Rust, Painter's Touch, American Accents, DAP, Zinsser, B-I-N, Bulls Eye 1-2-3, Perma-White Mildew Proof Paint, Cover-Stain, DIF, Shieldz, PaperTiger, Plastic Wood, Wolman, Varathane, Watco, Testors, Floquil
Performance Coatings: under the PPG brand and Pittsburgh Paints, Olympic, PPG Porter, Monarch, Lucite for the architectrual coatings Industrial Coatings: Under the PPG brand Architectral Coatings: Sigma, Seigneurie, Johnstone's (EMEA) Optical and Special Materials: CR-39, Trivex, Transitions Glass: Under the PPG brand
Sherwin-Williams, ProMar, SuperPaint, A-100, Duron, MAB, PrepRite, Duration, ProGreen, Harmony, ProClassic, Woodscapes, Deckscapes, Cashmere, HGTV Home by Emerald, Duracraft, Solo, ProIndustria, ProPark Dutch Boy, Krylon, Minwax, Thompson's, WaterSeal, Pratt & Lambert, Martin Senour, H&C, White Lightning, Dupli-Color, Rubberset, Purdy, Bestt Liebco, Accurate Dispersion, Unifle, VHT, Kool Seal, Snow Roof, Altax, Tri-Flow, Sprayon, Ronseal, DuraSeal, Lazzuril, Excelo, Baco, Planet Color, AWX Performance Plus, Ultra, Ultra-Cure, Kem Aqua, Sher-Wood, Powdura, Polane, Euronavy, Inchem, Sayerlack, Becker Acroma, Firetex, Macropoxy, Oece, Arti, Acrolon, Sher-Nar, PermaClad, Heat-Flex, Magnalux, ATX, Genesis, Dimension, Finish 1, Lanet, DFL, Conely, Marson, Metalatex, Novacor, Loxon, Colorgin, Andina, Napko, Sumare, Condor Krylon, Kem Tone
Synta Inc. (Clarkston, GA); Kirker Enterprises, Inc. (Paterson, NJ); Viapol Ltda. (Brazil); HiChem Paint Technologies Pty. Ltd. (Australia); FEMA Farben + Putze GmbH (Germany); Grupo P&V (Spain); Legend Brands (Burlington, WA).
Coatings business of Colpisa Colombiana de Pinturas (Colombia); AkzoNobel North America (architectural coatings business); Spraylat Corp. (Pelham, NY); Dyrup A/S (Denmark)
Consorcio Comex, S.A. de C.V. (Mexico); Geocel Holdings (Elkhart, IN); Jiangsu Pulanna Coating Co. (CHINA); Leighs Paints (UK)
It seems like the paint and coatings industry will have significant economic tailwinds and inflation headwinds in 2013. The shares of RPM, PPG, and Sherwin-Williams are not cheap and their prices could decline unless strategic and/or financial buyers surface.
Of the three companies discussed above, RPM seems like the company most likely to be acquired, due to its relatively smaller size and a number of lower valuation metrics. However, RPM recently acquired a number of companies and their integration could bring more volatility. Also, RPM seems overly optimistic in its assessment of future inflation.
PPG is the company that is most diversified across industries, customers, and products and it also has the largest international exposure and has the top one or two spot in all kinds of coatings. A strategic acquirer is not likely due to anti-competitive concerns but a private equity firm(s) could decide to take this company private.
And lastly, Sherwin-Williams looks like the least attractive company. Its recent expansion in China and the COMEX acquisition, which is the largest in the company's history, bring significant risks. While it has a large exposure in architectural coatings in North America, which should benefit as housing and construction continue to pick up in the U.S., the North American market is also highly competitive with store brands as well as brands such as Benjamin Moore, Martha Stewart, and Ralph Lauren. On the positive side, Sherwin-Williams has significant real estate property investments, which could be attractive to a financial acquirer.