Shares of dividend aristocrat PPG Industries, Inc. (NYSE: PPG) rose 23.3% in 2017, a few points ahead of the S&P 500. It marks a return to form for the paintings and coatings company after a disappointing 2016, when the stock fell 4%.
The rise in stock price in 2017 was welcome, but it was unusual in that the company's year didn't entirely go as planned. For example, PPG was ultimately unsuccessful in its bid to buy coatings specialist Akzo Nobel (NASDAQOTH: AKZOY) -- a deal intended to bolster growth and further PPG's aim of expanding its coatings activities. Moreover, strong rises in raw material costs increased PPG's cost of sales as a percentage of revenue and, therefore, reduced the gross margin in the first nine months.
No matter. The market discounted the bad news and focused on some of the positive aspects. For example, cost-cutting measures have reduced sales, general, and administrative costs on an absolute and relative basis. Throw in an improving outlook for the industrial economy -- PPG claims to be the global leading player in aerospace and automotive (original equipment and aftermarket), and the No. 2 in packaging, architectural, and general industrial coatings -- and PPG looks set for volume growth, which could help offset any further margin pressure.
There's no guarantee that PPG will increase its revenue growth rate; CEO Michael McGarry only expects "modest" growth in volumes in 2018, and raw material costs look set to rise further. For example, CEO Mark Vergnano of The Chemours Company (NYSE: CC), the world's largest producer of premium titanium dioxide (a key raw material in the coatings industry), claimed the company's titanium dioxide facilities were "highly utilized" and talked of "global supply tightness" on the last earnings call.
On a more positive note, if PPG can pass on any price increases (and improving end markets will certainly help), then the cost-cutting measures should lead to increased profits. Moreover, despite the setback with Akzo Nobel, the company remains on the acquisition trail within an industry that is in a period of consolidation; PPG has already announced an agreement to acquire an architectural paint and coatings wholesaler in the Netherlands.
Looking ahead, titanium dioxide pricing will obviously be a big focus for PPG investors, but probably the biggest variable in 2018 will be its acquisition strategy. Having decided to focus on coatings, PPG needs growth -- and that's likely to come from purchasing new businesses.
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