Our favorite fundamental chemical idea PPG Industries (NYSE:PPG) reported record third-quarter results. Net sales jumped 17% versus the prior year (about 4% organic expansion), and the firm posted record adjusted earnings per diluted share from continuing operations of $2.44, up an impressive 30%+ from the year-ago period. We liked the operating leverage inherent in performance as well as the firm's ability to hit the ground running with impactful transactions. The company noted that aerospace and automotive OEM coatings, both up about 10%, were the key drivers behind PPG's top-line expansion, though other business lines did contribute as well, including the company's architectural coatings operations. Volume trends improved in all regions of the world, and the firm's cost-reduction initiatives continue to bear fruit (the firm continues to execute on its targeted acquisition synergies from the AkzoNobel deal).
Though PPG indicated that US architectural coatings sales will take a seasonable drop of about 25% on a sequential basis in the fourth quarter, the trajectory of this business line is largely expected, and we point to potential upside in its aerospace business as an area that may mitigate any shortfall. The firm's cash balance continues to swell, now $2.5 billion at the end of the third quarter, as PPG has hauled in more than $1 billion in free cash flow year-to-date (~$1.3 billion in cash from operations less $260 million in capital spending), or more than 8% of net sales. PPG remains our favorite fundamental idea in the chemicals space, though we note its valuation is starting to get a bit rich. We're watching its pricing performance closely, however.