NEW YORK (TheStreet) -- PPG Industries' (PPG) 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).
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).
Pullback on the Daily Chart Sets Up for a Low-Risk Entry Point
Shares of PPG Industries gapped higher the morning of the Comex deal announcement and finished the day higher by 3%. Since then the stock has drifted lower and until the successful retest of the former resistance level turned current support at $205 on July 10th. This type of bullish price action sets up for a minimum move up to the Comex deal announcement intra-day high of $213.01 and likely into the high $210s in the near term.
PPG Industries Options Trade Idea
Buy the July $210 call for $2.80 or better
Stop loss- None
1st upside target- $5.00
2nd upside target- $8.00
At the time of publication the author plans on buying July $210 calls prior to the second-quarter earnings report. He had been in the July $200 calls until after the announcement of the Comex deal..
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates PPG INDUSTRIES INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate PPG INDUSTRIES INC (PPG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- PPG's revenue growth has slightly outpaced the industry average of 7.2%. Since the same quarter one year prior, revenues rose by 17.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The current debt-to-equity ratio, 0.57, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.33, which illustrates the ability to avoid short-term cash problems.
- PPG INDUSTRIES INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PPG INDUSTRIES INC increased its bottom line by earning $6.94 versus $4.69 in the prior year. This year, the market expects an improvement in earnings ($9.44 versus $6.94).
- 42.49% is the gross profit margin for PPG INDUSTRIES INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 34.70% significantly outperformed against the industry average.
- Net operating cash flow has significantly increased by 283.14% to $163.00 million when compared to the same quarter last year. In addition, PPG INDUSTRIES INC has also vastly surpassed the industry average cash flow growth rate of 0.29%.
- You can view the full analysis from the report here: PPG Ratings Report