|Shares Out. (in M):||142||P/E||22.1x||18.0x|
|Market Cap (in $M):||25,920||P/FCF||NA||NA|
|Net Debt (in $M):||1,661||EBIT||1,995||2,116|
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PPG Industries, Inc. (“PPG”) is an attractive, event-driven long opportunity. Over the past few years, PPG has been embarking on a corporate restructuring, steadily becoming more of a “pure play” coatings company. As part of this restructuring and by the middle of 2014, the Company should complete the sale of its 51% interest Transitions Optical for $1.5 billion in after-tax proceeds. Post the closure of this transaction and combined with the Company’s free cash flow, the Company will have >$4.0 billion in cash on its balance sheet. During the 4Q13 earnings call, management indicated that over the next 18-24 months they intend to direct $3-4 billion in cash toward growth initiatives and returning cash to shareholders, either of which should drive the stock upward. Please note that this $3-4 billion (i) is in addition to PPG’s dividend distributions which amount to ~$350 million annually and (ii) is without the potential of PPG adding leverage to its balance sheet (total current leverage is only 1.4x EBITDA). Very conservatively, management could return $3.7 billion ($3.0 billion plus $700 million in dividends) to shareholders over 24 months, equating to a 14% yield based on the Company’s market cap of $26 billion. That’s the conservative case, suggesting that the risk/reward profile for PPG’s stock is highly skewed to the upside. Further, from a fundamental perspective, the Company is performing well: (i) it’s businesses are experiencing growth and are leveraged to a recovery in non-residential construction, (ii) the Company should benefit from continued realization of cost synergies from its acquisition of Akzo Nobel’s Architectural Coatings business closed in April 2013, and (iii) volume trends in Europe are improving for PPG and any business recovery in the continent represents embedded upside “optionality” for earnings.
Management has indicated that their preferred use of cash is to pursue strategic M&A transactions, which given PPG’s track record will almost undoubtedly be accretive. However, without the ability to incorporate “potential transactions” with any degree of accuracy into projected financials, I am projecting that PPG uses its cash to repurchase $4.0 billion worth of stock over the next 24 months. Under this scenario, I have the Company earning ~$11.70 in EPS in 2015. At 18x this (a multiple in-line with its peer average and where PPG has historically traded), I think the stock reaches $210, ~15% higher than current levels. However, there are several “blue sky” scenarios which could drive the stock much higher. Just two of these are: (i) the Company leveraging its balance sheet from 1.4x to just 2.0x Debt/EBITDA and buying back an additional $1.6 billion in stock or (ii) the Company conducting a Dutch tender offer which would drive it’s EPS higher by immediately lowering its average share count.
In addition to these key attributes, another positive consideration for PPG's Coatings business is:
|PPG Industries, Inc. (PPG)|
|($ in millions)|
|Architectural Coatings - EMEA||2,062.0||2,103.2||2,145.3|
|Optical and Specialty Materials||1,262.0||693.2||504.8|
|Revenue Growth, % (p-o-p)|
|Architectural Coatings - EMEA||(4.0%)||2.0%||2.0%|
|Optical and Specialty Materials||5.0%||(45.1%)||(27.2%)|
|Architectural Coatings - EMEA||184.0||191.9||195.8|
|Optical and Specialty Materials||368.0||208.0||151.4|
|Corporate and Unallocated||(243.0)||(240.0)||(240.0)|
|Segment Income Margin, %|
|Architectural Coatings - EMEA||8.9%||9.1%||9.1%|
|Optical and Specialty Materials||29.2%||30.0%||30.0%|
|($ in millions)|
|Cash Operating Costs||12,686.0||12,803.1||12,905.3|
|Total Depreciation and Amortization||475.0||490.0||480.0|
|Net Income||$ 1,320.0||$ 1,392.6||$ 1,482.1|
|Net Income to Common||$ 1,198.0||$ 1,392.6||$ 1,482.1|
|FD Shares Outstanding||145.1||137.0||127.0|
|FD EPS||$ 8.26||$ 10.17||$ 11.67|
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