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PPG Industries Is a Buy Ahead of Second-Quarter Earnings

NEW YORK (TheStreet) -- PPG Industries' (PPG - Get Report) recent acquisition of Mexico City-based Comex Group for $2.3 billion gives PPG the second largest paint market share in Mexico behind rival Sherwin-Williams (SHW).

Currently, Comex has 3,600 stores compared to Sherwin-Williams' 3,900+ paint stores in Mexico. Sherwin-Williams had initially been set to acquire Comex for $2.34 billion, but the deal was terminated. Given that PPG Industries business is largely in the automotive coating segment, this deal has a higher probability of going through, giving PPG a more diversified business if accepted.

When comparing the large players in the industry, Sherwin-Williams only has PPG Industries beat on two key metrics. Sherwin-Williams trades at a P/E ratio of 19.33x (2015 estimates) with 23.6% EPS growth, price to sales ratio of 1.93x, price to book ratio of 12.09x, and has 6.8% revenue growth (9.3% this year). This compares to PPG Industries' P/E ratio of 18.72x (2015 estimates) with 17.7% EPS growth, price to sales ratio of 1.83x, price to book ratio of 4.79x, and has 8.1% revenue growth (2.1% this year).

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Keep in mind these forward estimates don't take into account any financials of Comex. PPG Industries also has the slight edge on the dividend with a current yield of 1.29% compared to Sherwin-Williams' 1.09% dividend yield. Short interest in both companies is relatively low (2.39% for Sherwin-Williams and 0.81% for PPG Industries).

The average analyst price target for PPG Industries shares is $225 (8.16% upside from current levels). The last four analyst price target changes include: Robert W. Baird ($215->$225 on 7/1), JPMorgan ($208->$225 on 7/1), Deutsche Bank ($225->$235 on 7/1), and Jefferies ($228->$240 on 6/6).

On April 17, PPG Industries' first-quarter EPS rose over 25% to $1.98 vs. the consensus Wall Street estimate of $1.87. The top line saw improvement as well with revenue rising 17% year over year. The performance coating segment revenue increased 27% to $2.01 billion. The company has beaten the consensus EPS estimates for five straight quarters now.

Following these strong quarters the stock has closed higher on four of the last five days PPG has reported, averaging a 4.32% gain on the four higher closes.  Shares currently trade around $208, up nearly 10% for the year to date.

Call Buyers Sit Tight Ahead of the Upcoming Earnings Report

Ahead of second-quarter earnings Thursday, the buyer of 4,000 July $210 calls for $3.60 each continues to remain long the $1.44 million bet (by far the largest open option position in PPG Industries). This trade from June 11 was part of a rollout from 2,495 July $200 calls for $8.30 each (paid $5.40-$6.70 on 5/28). The big buyer of the July $210 calls has a breakeven of $213.60, if held into July options expiration (2.68% above current levels).

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