18 months ago I encouraged Seeking Alpha investors to go long on leaders in the paint and coatings industry. Companies are on a growth path in advanced countries and emerging markets. Mergers and acquisitions activity is consolidating paint manufacturers into bigger companies, producing more gallons at lower costs with current equipment and facilities, securing global reach, and they sell into market sectors that continue to expand: architectural, decorative paints, OEM/technical coatings, and automotive paints.
For humor read my July 18, 2014 article Paint: Underneath All The Boredom Are Great Investment Opportunities but skip it for now. There I report through 2012 the industry enjoyed a 5.4% annual growth rate for the past decade with sales volume of $127.3b in 2012. The recent economic stagnation especially in the Asia-Pacific markets and stock market sell-down make these companies attractive investments.
WORLD'S TOP TEN PAINT BRANDS in 2014
(Published by WPCIA January 5, 2015 Washington)
- AKZO NOBEL (OTCQX:AKZOY) $17.746 billion
- PPG Industries (NYSE:PPG) $15.44 billion
- SHERWIN-WILLIAMS (NYSE:SHW) $11.54 billion
- Axalta $5.892 billion
- BASF (OTCQX:BASFY) $4.982 billion
- RPM Inc (NYSE:RPM) $4.3784 billion
- DIAMOND Paint $4.361 billion
- VALSPAR (NYSE:VAL) $4.357 billion
- SACAL $3.774 billion
- NIPPON Paint (OTC:NPCPF) $3.234 billion
The 2014 annual report from the World Paint & Coatings Industry Association global paint sales increased 3.9%, and total sales about $ 132.3 billion. The lower than previous annual growth rate is largely due to the worldwide economic slowdown lowering demand and new technologies coming on line that make paints last longer and go further in applications.
Architectural coatings continue generating the largest percentage (48%) of total paint sales of $63.504 billion. Industrial coatings in 2014 were 29% of total sales or $33.075 billion. There were 14 companies with coating sales in excess of $1 billion in 2014; three companies had sales over $10 billion. My recommendations remain from 18 months ago for buys of Akzo Nobel, PPG, and Sherwin Williams.
AKZOF stock was trading then at $71 per share. The price fell off to $63 per share making it a better buy. Q3 2016 net profit rose nearly 25%, and income from operations for Q3 increased nearly nine percent from the October-December period in 2014. Akzo was ranked number one on the Dow Jones sustainability index for the fourth consecutive year. 20% of revenue is on target generating by 2020 from sustainable solutions that means more product innovation from the company. Following M&A activity bringing under its wing brand names like Dulux, Sikkens, and International, the company is currently focusing on improving operations, organic growth, innovation and sustainability. They are aiming for 9%-11% return on sales and 13%-16% ROI.
PPG is trading down from about $120 per share to $92. It continues the 40+ years tradition of raising the dividend, but the low yield of about 1.5% forward remains a drawback to some investors. PPG is seeking growth in automotive coatings and aerospace industries. Gross sales grew in the last quarter by 7% in Mexico and 3% in Europe. Jim Cramer declares PPG a bargain at this price complementing an overwhelming number of analysts who recommend, "buy" and "strong buy" ratings.
If architectural coatings and automotive coatings remain stable, PPG revenue is expected to grow by 2,2% and EPS at 10%. Their North American architectural coatings lag behind Sherwin Williams and Benjamin Moore paints at the higher-end finish coatings (quality and price margins) paints.
Valspar was my favorite buy in the paint and coatings business 18 months ago was selling at about $76. Following a brief price slide ($70.58) in October 2015 a stock rebound brought it back to $76 currently. PE is 15.7 (TTM). Its 52-weeks high peaked $90.91 per share. The company increased its dividend by 15%.
Val's strength has traditionally been in technical coatings with a respectable but smaller share in retail coatings. It purchased Cabot Wood Stains, a moderately priced, high quality line popular among homeowners and contractors. Val is expanding distribution of Cabot in hardware stores chains, and big boxes like Menards, Home Depot (NYSE:HD), and in January 2016 announced the line is entering Lowe's stores. These moves concomitant to Benjamin Moore's pressuring their retailers to sell only Ben Moore products will see the more than 6,000 independent paint stores selling Cabot begin to drop the line along with other Valspar paints.
Revenues turned down in 2015 over 2014. Profitability has operating margins at a respectable 14.27% and profit margin at 9.1%. A major goal of Valspar 18 months ago was to increase cash to "fund internal growth." Then Val held $116m in cash and $1b in debt. Debt today is about $2b and cash tops $185m. Valspar appears stagnant but a solid company. There just doesn't seem any excitement coming from the boardroom that inspires investment confidence. They seem to be running in place for the near term with flat revenues.
My attention is on PPG for expansion, revenue growth and investment opportunities. PPG is a safe harbor for investors looking to get more for parking their cash someplace other than a bank without much more risk. I believe a fair target price with a market recovery is about $102 per share. Regardless of your investment choice, buy paint they're always selling more of it. Tom Sawyer painted the fence with three coats of paint collecting treasures along the way. Here's your opportunity to see what paint can do for you.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: have a chart to send but cannot manage to include in text
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