Paint: Underneath All The Boredom Are Great Investment Opportunities

Includes: AKZOF, PPG, SHW, VAL
by: Dr. Harold Goldmeier


The paint and coatings industry enjoys steady growth in advanced economies and emerging markets.

Mergers and acquisitions are consolidating paint manufacturers into ever bigger companies insuring their growth through globalization.

Companies sell architectural, decorative paints, technical coatings, automotive paints. One company seems a particularly good investment.

Paint. Boring subject. Object of bad humor and satirical put-downs: "You're as exciting as watching paint dry." What is red and smells like blue paint? Red paint. Paint manufacturers are laughing all the way to the bank, as are their long-term investors.

A recent report from World Paint & Coatings Industry Association (WPCIA) documents a 5.4% annual growth rate for the past decade for paints and coatings. The industry accumulated a $127.3b sales value through 2012. The U. S. hosts more than 1,000 manufacturers with sales of $22b. The 50 largest collect 80% of revenues.

Architectural paints generate about 40% of revenue purchased from independent paint-hardware stores, direct from manufacturers, and home centers. Paint business depends on increasing Main Street prosperity. People are moving again, and commercial spaces are renovating.

Industrial coatings including auto paints, furniture, wood coatings, hi-tech, marine, aircraft and aerospace, powder coatings, and specialty coatings like fire retardants, generate much of the balance of industry revenue. Additives and polishes, tools, and equipment add to revenue generation and healthy margins. Coatings World is an essential reading material of the industry.

The top paint companies practice globalization religiously. M&A is fast and furious in the industry. Israel's Azrieli Group is selling Tambour to Singapore's Kusto Group for $144m. PPG Industries (NYSE:PPG) owns Dulux (Glidden) it bought from Akzo Nobel (OTCQX:AKZOF). California Products Corp is buying Muralo/Graham Paint. Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) owns Benjamin Moore. Nippon Paint (OTC:NPCPF) is buying a 39% stake in a German automotive paint company.

The growth markets are primarily China, India, and Indonesia. Asia Pacific accounts for 48% of the output in tons, and 38% of the output value in dollars (source, WPCIA):

Environmental regulations are less problematic. VOC compliance through new technology like eco-friendly waterborne coatings made with nanotechnology is standard. The industry was nearly derailed for using toxic substances like lead and mercury. A strong R & D program not only salvaged the industry, but also is driving expansion.

Here are four companies worth investigating for long-term investment. Netherlands based Akzo Nobel does $15b in sales with a market cap exceeding $17b. It is a leader in China's construction paint market, European decorating paints, and powder coatings. AKZOF offers a 2.14% yield. It currently trades at $71.39 per share midway between its 52-weeks high of $83.49 and $58.20. The stock trades at 16 times earnings. Sales for the year are down reportedly 7% due to Europe's sluggish economy and divestments. Management strategy is to grow by building consumer confidence in its brands and acquisitions.

PPG Industries is flexing muscles these past few years. PPG expanding is architectural paint sales through home centers and company stores. Its automotive paints division and tech coatings complement an aggressive pricing campaign challenging Dulux (Glidden) and Sherwin Williams (NYSE: SHW) in the wholesale markets. PPG has more than 140 manufacturing plants and affiliates in more than 60 countries. Coating sales are $15b. The company is targeting Asian markets with high performance and architectural coatings. In 2013, the government contracted with PPG to develop chemical agent resistant coatings in powder form for military vehicles and equipment.

One year ago, PPG shares traded at $156. Today shares trade around $203 per share, or 21 times earnings. Second quarter profit is up 13%. The dividend yield is only 1.3%. Sales are up 5% over a year ago, while EPS is higher more than 30% in the past 18 months. The PPG market cap is $28.5b, and net profit margin is a healthy 13.3%.

In 2014, PPG acquired decorative texture coatings company The Homax Group. Their products are a staple in good paint stores. After Sherwin Williams failed acquiring Consorcio Comex of Mexico, PPG is offering $2.3b. Comex paint is sold in 3600 stores in Mexico and Latin America. PPG's growth is going to be in paint now comprising 90% of PPG's revenue.

Sherwin Williams is huge in automotive and architectural paints. SHW has about the best quality, range of products, and prices for protective and marine coatings. End users of these coatings prefer staying with the same brand throughout a job, so SHW benefits from add on sales of its other products like epoxies and floor coatings. SHW also sells a full line of tools and equipment, carpeting, and flooring.

The stock is $208 per share, or 24 times earnings. Caution is advised. Market cap is $20.9b. Net sales for the first six months of 2014 increased 12.1%. The Consumer Group sales increased over ten percent opening 33 new stores in the first half of the year. Paint consumers do not travel more than two miles from home for their paint, so store expansion contributes greatly to new customer growth. SHW's n brands include iconic names Dutch Boy, Krylon, Minwax, Thompson's Water Seal, and Pratt and Lambert.

My personal favorite is Valspar Corporation (NYSE: VAL). The stock is an affordable $76 per share. Sales hover around $4b. Coatings sales are up 11.3% for a six months period. Margins on these products tend to be stronger than retail paints where sales are up 8.6%. Consolidated gross profit is touching $700m up from $633m six months ending in 2013, and net income is up 12% year-to-year. Market cap is $6.3b.

Getting paint onto store shelves is the linchpin in this business. It's all about distribution. Valspar excels distributing their retail architectural paints sold under Valspar and private labels in Wal-Mart, Lowes, B & Q in the UK, other big box retailers. VAL makes Ace labeled paint for 4,000 member stores, and for Do-it-Best. VAL has a very strong technical coatings division (agricultural finishes); for instance, VAL has a railroad car paint that can withstand deterioration from swarms of locust in the plains states. Think of what your windshield looks like driving through the country on a summer day.

Fixed costs for paint manufacturers require production at high capacity producing gallons for profitability. The best margins are in manufacturing compared to retail margins. Valspar's has retailer outlets keeping plant productions high. Management is turning inwards focusing on growth through internal efficiencies, maximizing sales, and growing cash flow to "fund internal growth."

VAL holds $116m cash, but debt tops $1b. Another economic downturn that deeply affects the housing and construction markets will put real pressure on VAL. A company wanting to increase their output will see Valspar as a takeover target or merger partner.

Dr. Seuss did a lot for paint with his bold and bright colors captivating children as they read his stories. Take a look at paint companies for investing like three brown bears and one red in between, "Why fit in, when you were born to stand out?"

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Author sold his retail/wholesale paint business with five locations and 70 employees in 2010.

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