CFA RESEARCH CHALLENGE REPORT FINAL (Feb 9,2014)-TEAM G(1)
1. CFA Institute Research Challenge
CFA Institute Research Challenge
Hosted by the CFA Society of
Pittsburgh
Team G
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2. CFA Institute Research Challenge
Team G Student Research
This report is intended for educational purposes
only by students competing in the CFA Research Challenge
Highlights:
PPG Industries Inc.: Investment Consideration
• We issue a BUY recommendation with a target price of $213. It implies a 1-yr holding period
return of 18%, for the fiscal year 2013, PPG Industries, Inc. revenues increased 12% to $15.11B. PPG
Industries is one of the largest specialty chemical companies in the world. The company currently
stands as one of the top coatings manufacturer, producing premium products to six business
segments’ and markets its products to nearly 70 countries.
• Low risk and Strong Management: PPG’s financial position and being well managed makes the
company low risk, the company’s ROA increased to 7.64% from 5.70% in 2013. This is indicative of
the company’s operating efficiency. The company’s ROI also increased form 7.59% to 10.46% in 2013,
this indicates the strong management decisions involving debt and acquisitions.
• Financial performance and position: The overall net sales of the company increased 12 % from
the previous year, which shows the performance coatings segment performed better overall than
the other segments. The total net income of the company increased to 41%. Our Earnings estimate
for 2014 is estimated to be $9.32 compared to the previous year’s estimate of $8.20 a share. In 2013,
the company has also increased its asset base by actively involving in the acquisition of Akzo-Nobels
Architectural coatings business, this helped them increase their net profit margin from 6.19% in 2012
to 7.65% in 2013. PPG is in top positions across all end use markets, giving them a strong competitive
position among its peers.
• Growth Rate Factors: The industrial coatings segment had an 11% growth rate in 2013, the
optical and specialty chemicals segment saw a 5% and 3% growth in 2013. The only segment which
slid was the Architectural segment which operates predominantly in the EMEA region slid 4 % in
sales, this is due to the less demand for the coatings in those areas. The regional companies in the
EMEA region have a stronger foothold. However in 2014 we estimate an overall sales growth rate of
4.8% taking into consideration, the price, volume, FX and Acquisitions & Divestures which affect the
growth in sales, PPG saw a 10.1% growth rate of sales due to acquisitions and divestures.
• Risks: Given the Macro level impact of the of the commodity prices there is an uncertainty
surrounding chemical companies overall. The European crisis will play a crucial role, moving forward
on the long run. The US Housing sector is one of the key consumers of the chemical industry, will
also play an important role as housing starts declined in December to 1M from 1.1M in November.
Added to this this there is a weakness that persists in the construction industry, which will pose a
treat. A decline in the housing market could slump revenues. Other regulatory and FX issues can
play an important role as well, as PPG’s business segments are spread across different segments.
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Low Risk
High
Growth
Under
Valued
Well
Managed
Good
Financials
Strong
Moat
Date: February 2014 Recommendation
BUY
Current Price: $180.5
Target Price: $213.02
PPG Industries Inc.: NYSE (PPG)
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Business Description
PPG Industries, Inc. operates as a coatings and specialty products company. The company's Performance
Coatings segment offers coatings products for automotive and commercial transport/fleet repair and
refurbishing, light industrial coatings, and specialty coatings for signs; supplies sealants, coatings, technical
cleaners and transparencies for commercial, military, regional jet and general aviation aircraft and transparent
armor for military land vehicles; and coatings and finishes for the protection of metals and structures to metal
fabricators, heavy duty maintenance contractors, and manufacturers of ships, bridges, rail cars, and shipping
containers. PPG Industries sells its products through company-owned stores, home centers, paint dealers,
and independent distributors, as well as directly to customers worldwide. The company was founded in 1883
and is headquartered in Pittsburgh, Pennsylvania.
Performance Coatings, Industrial Coatings and Architectural Coatings EMEA: PPG Industries is a major global
supplier of protective and decorative coatings. The reportable segment supplies protective and decorative
finishes for customers in a wide array of end-use markets. The coatings industry is highly competitive, with
PPG Industries pitted against the world’s largest coating companies in the primary markets, and many smaller
regional companies.
Optical and Specialty Materials: The segment comprises optical products and silica businesses. The primary
products in the segment are Transitions lenses, sun-lenses, optical materials and polarized film; amorphous
precipitated silica products for tires, battery separators and other endues markets; and Teslin synthetic
printing sheet used in such applications as waterproof labels, epassports, driving licenses and identification
cards.
Commodity Chemicals: PPG Industries is a producer and supplier of basic chemicals. The segment produces
chlor-alkali and derivative products including chlorine, caustic soda, vinyl chloride monomer, chlorinated
solvents, calcium hypochlorite, ethylene dichloride and phosgene derivatives.
Glass: PPG Industries is a producer of flat glass in North America and a global producer of continuous-strand
fiber glass. The segment comprises the performance glazing’s and fiber glass businesses. The company s
major markets are commercial and residential construction and the wind energy, energy infrastructure,
transportation and electronics industries.
Total Sales:
The sales revenue of 2013, was highly influenced by the Performance coatings segment which attributed to
39% of the total revenue. The volume trends were consistent in the Fourth quarter, especially for the
American and the Canada region. The acquisition of the North American Architectural Coatings business of
Akzo-Nobel proved to bring 300M in sales. There was also a solid growth in the Asian end-use markets. The
overall aggregate earnings of the coatings segments, grew approximately 20% which is aided by efficient
cost management that included, restructuring and earnings through acquisitions. Cash from operations grew
almost 15% to 1.8B from the previous year. More balanced cash spending occurred in 2013, with nearly 1.5B
and 1.35B attributed to share repurchases and cash dividends. The currency fluctuation of the Euro/ Dollar
gave a 0.2% overall impact to the net sales. The sales was mainly impacted by the Price and Volume which
attributed to an increase of 1.5% and 2.2% respectively. The main impact of the Fourth quarter sales was due
to Acquisitions and Divestures which grow to over 10.1%. The majority of the sales came from the US &
Canadian region which attributed to a 47% overall increase in sales.
Company Strategy:
• Focus on stronger Earnings Growth, with a record of 45 % increase in the Earnings per share for almost
14 consecutive quarters.
• Improving the Volume trend, has been the main focus of the company which is seen through their North
American and Asian Sales figures for 2013
• The continued effort of the company to focus on Acquisitions and Restructuring which added almost
300 Million in Net sales for 2013
• Improvisation to the working capital which increased to a 160 basis point from the previous year.
• Stronger focus on the Aerospace Industry in 2014, will shift towards European and Emerging markets,
where there is a lot of demand.
39%
32%
14%
8%
7%
Net Sales PPG 2013
Performance Coatings
Industrial Coatings
Architectural Coatings - EMEA
Optical and Specialty Materials
Glass
18%
47%
34%
1%
Regional Sales
Asia US & Canada
Europe Latin America
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$500.00
$1,000.00
$1,500.00
$2,000.00
2008 2010 2012 2014
Capex
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Management Structure and Ownership: The management structure consisted of the CEO and Chairman, Charles E. Bunch, and 6 Vice Presidents
who controlled the various responsibilities within the organization. At the end of 2013 there were 142 Million shares outstanding, and 72 % of
the attributed to institutional ownership. There were 717 Major shareholders, in which Vanguard Group Inc. holding the majority of the shares
nearly 1.4 million. The total number of shares owned by institutional investors where close to 102.7 million.
Industry Overview and Competitive positioning
The industry is mostly concentrated. There is a presence of few large firms competing for market share. Between the large firms competing
for market share, rivalry is apparent. PPG is fighting this battle by growing their top line and becoming more of a coatings specialist. Through
acquisitions in the last year, PPG is developing more market share and better positioning itself in the coatings sector. The industry itself is
mostly mature with the capability of low to moderate organic growth. Since signs of prevalent growth are not there, the main competition is
market share, except in foreign markets where growth is still probable. PPG is overcoming this growth issue by becoming more specialized,
and moving away from its past conglomerate state. With over nine billion invested in property, plant, and equipment, the barriers of entry
into this industry are high. High fixed costs result in the need to work at a higher capacity to effectively diminish the effects of fixed costs per
unit sold. Furthermore, the effect of accumulated depreciation also reduces their fixed costs with over 50% of their property, plant and
equipment depreciated. The higher working capacity may create an excess supply in the market causing competitors to be cannibalistic in
terms of seeking market share.
The largest end market in the global coatings industry is architectural. PPG along with AkzoNobel and Sherwin Williams share much of the
market power in this 50 billion dollar end market. PPG competes in this market by using a pricing strategy with their line of Glidden paint.
AkzoNobel and Sherwin Williams, along with Behr consume most of the top line paints for use in home, but PPG really shines in their sales of
paint towards those who repaint, such as renters or businesses. In recent quarters PPG has been attempting to overcome this stigma through
acquisitions. Acquiring AkzoNobel’s North American architectural coatings business and Sherwin Williams’s Comex should greatly expand
PPG’s end market share in the architectural market.
Sustainability is a major trend in the industrial market. A large amount of market sentiment in current times comes from how the customer
views management and their decisions. PPG has been and continues to make strides in environmental and personal safety in their product
despite past lawsuits. PPG is number two behind AkzoNobel in the industrial end market. PPG maintains a balanced sales orientation between
after-market, maintenance coatings, and OEM coatings; with auto sales rising and maintenance showing possible growth, the industrial end
market should show some growth. Large growth in vehicle sales in the UK, China, and Brazil, along with moderate growth in the US car market
should propel PPG’s sales growth in both areas of their balanced sales orientation. Growth in emerging countries has shown some rebounding
which will also lead to some moderate growth in the industrial coatings and also packaging, all contributing to a slight to moderate rise in
the sales of industrial coatings. Aside from automotive refinishing, the performance coatings segment of PPG also shows slight growth
opportunities. These opportunities arise from growth in the aerospace market, with consistent growth historically in this area, plus the
movement towards more and bigger planes gives PPG the ability to sell more content per plane, and also coat more planes.
New projects offer the ability to grow market segments. PPG’s relatively new business unit, Protective and Marine Coatings, has only been
around for a few years, but PPG has already become a world leader in this end market. PPG has growth opportunities in the protective
coatings segment, especially from offshore wind farms and other anti-corrosive needing machinery that are exposed to very corrosive
elements. Much of this growth stems from Korea, Japan, and China, and the need for more sustainable clean energy. Since these projects
take years to complete sometimes, we foresee moderate sustained growth in the protective and marine coatings end market.
PPG SWOT Analysis Strengths: PPG has been actively acquiring companies to strengthen their portfolio of coatings and specialty products.
The most recent major acquisition PPG acquired was with AkzoNobel. The purchase of
AkzoNobel was the second largest in company history and extends PPG’s architectural coating
business through North America and the Caribbean. The acquisition of AkzoNobel was
finalized at a deal of $1.05 billion. The largest acquisition in company history was in 2008 when
PPG acquired SigmaKalon. SigmaKalon is a Netherlands-based company and was purchased
for $3.2 billion. The company was a producer of architectural, protective, marine and industrial
coatings. Through the acquisition PPG added 22 manufacturing facilities across Europe and
throughout the world to strengthen PPG’s portfolio. Also through the acquisition with
SigmaKalon PPG acquired 500 SigmaKalon owned stores and approximately 3,000
independent wholesalers. In January 2012 PPG acquired a Denmark-based manufacturer of
architectural coatings and specialty products called Dyrup. With the addition of Dyrup to
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PPG’s product portfolio it added six manufacturing facilities to help globalize PPG’s presence throughout Europe. Also in the same month
PPG and its subsidiary, PPG Columbia, acquired Colpsia Colmbiana de Pinturas and its affiliates, including Colpsia Ecuador. This acquisition
helped expand PPG global diversification throughout Colombia and Ecuador. PPG has presence in more than 70 countries spanning all across
the globe. The company operates 124 manufacturing facilities in 44 different countries. The company generated 43.3% of the total revenues
from the US, 31.8% revenues from EMA, 17.2% from Asia Pacific and other Americas 7.7%. The company is protected by geographically
diversified revenue stream and distribution channel.
Weaknesses
There can be a negative impact on the company brand image due to Asbestos-related lawsuits. In the past, PPG has been dealing with over
114,000 lawsuits involving personal injury from exposure to asbestos. The company’s liabilities form the asbestos lawsuits are from its 50%
interest in Pittsburgh Corning. Pittsburgh Corning is a bankrupt company that manufactured thermal insulted products. In May 2013, the
United States Bankruptcy Court for the Western District of Pennsylvania issued an interim order that would make PPG pay approximately $825
million to the asbestos settlement trust.
Opportunities
PPG acquiring more business segments will help increase their global platform. The company needs to increase focus on coatings and specialty
materials business. An agreement with Asian Paints will help expand customer base in India. Both PPG and APL own a 50% interest in Asian
PPG Industries to serve global and India-based OEMs and aftermarket customers in India. PPG Industries Joint venture is the industrial liquid,
marine, consumer packaging and transportation coatings for India. PPG made a joint venture with APL called Asian Paints PPG. Asian Paints
PPG provides protective, industrial powder, industrial container and light industrial coatings in India. PPG should expand its precipitated silica
production capacity. Precipitated silica is used for a reinforcing filler in tires, industrial, footwear, and silicone rubber applications. Also silica
can make Teslin subrate, which is a material used for card, specialty print, tag, and labels. PPG is forecasting that the precipitated silica market
will increase growth in the future. The company announced that it is increasing production in silica by 22,000 tons in its manufacturing facility
in Lake Charles, Louisiana. Another opportunity for PPG is their marine coatings segment that is expected to grow.
Threats
PPG’s financial results are significantly affected by the volatility of raw material pricing. The expenses of coating generally comprise between
70 % and 80% of coatings cost of goods sold. Raw materials are PPG’s single largest production cost component. Due to inflation raw
materials cost increased nearly $725 million over a three year span. The increase of raw materials could affect the company’s operating margin.
The company faces competition from large international competitors across all market segments. This could make the company reduce prices,
which could affect company margins and bargaining power. PPG’s capital growth could be stunned due to environmental obligations. There
are strict environmental regulations. In 2012, the environmental control projects amounted to $12 million. Which was a decrease from previous
years (FY 2011 $15 million, FY 2010 $16 million). The company is projecting control costs would be forecasted around $10-$15 million.
Macroeconomic Chemical Sector Outlook. The world GDP is set to decrease to about 2.5% in
2014, but in 2015, this trend will rise to 3.0%. This pace sets the stage for the chemical companies
where new trends and innovation are rising. The US Chemical Industry will see an overall growth
in customer improvement and the emerging markets will provide a more bullish outlook going
forward. There are strong fundamentals and the current oil and gas advantage is set to improve
the overall growth of the US Chemical sector.
The developed countries saw recession in 2012 and 2013, where Europe and the China slowdown
brought in all sorts of uncertainty that can slump growth throughout the world. The current
situation in the emerging markets is improving and the BRIC (Brazil, Russia, India, China)
countries are slowly improving. Also, the European countries are recovering from the recession, inflationary and monetary policies that have
been loosened, which will provide a more positive outlook for the World going forward in 2014.
The manufacturing and Housing sectors are the key consumers of the Chemical Industry and this weakness can been seen in the Europe and
China. But the global industrial production cycle is on an upward momentum and slowly beginning to improve the situations in these
Countries. The situation in US is set to improve in 2014, which will improve the overall chemical industry prospects. The overall growth in the
US is will be slow but steady in 2014, and these can be seen in the trends of the ACC’s Chemical Activity Barometer, which is a composite
index of economic indicators that track the level of activity in the Chemical Industry. The current trend indicates a slower growth in 2014, but
however due to activity in the supply chain, the chemical industry is set to lead, going forward in the future. The US GDP for 2015, will be set
to increase at a 3.0% growth rate. The current boom in the oil and gas space, will improve the overall industrial activity and then accelerate
the overall growth in the economy.
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The US chemical outlook will improve in 2014 and 2015, following a 0.1% gain in volume from 2012 to 1.6% gain in 2013. There is also an
expectation in the production gain of about 2.5% in 2014 and 3.5% in 2015, according to the American Chemistry council research. Most
notably the Specialty chemical industry is poised to increase in 2014 and 2015, mainly due to the end-use markets. Overall outlook of the US
chemical industry will beat the average growth rate of the US economy. The American chemistry revenues are projected to improve in 2014
to 2018.
Key Focus Markets: Automobile Sector
Due to the weak export markets, the growth in the manufacturing slowed down in 2013. But
certain sectors gained stronger in 2013, with light vehicles, aircraft, construction materials, and
some industries involved in business development. Moving forward in 2014, the main prospect
for growth will largely depend on the consumer demand for goods, which translates to better
factory output and sales numbers. In addition to this, the growth in the Oil and Gas sector is
creating a better development in the Buy-side which are the oilfield machinery, pipe mills etc.
and the supply side which are the chemicals, fertilizers etc.
The light vehicle market is a major consumer of the chemical industry which contributes to nearly
$3500 per vehicle and the production will tend to increase in the future. The sales for light
vehicles are set to increase in 2014, as employment situations are improving and growth in
income levels rise. The availability of better credit for the consumers, provides a more bullish outlook for the chemical industry.
Housing Sector
The Housing sector is one of the largest consumers of the Chemical industry, and specialty chemicals is a large supplier for the housing. The
general outlook is very good moving forward in 2014. The housing sector consumes approximately $15,000 per household, this number will
increase as the overall price of Chemicals are set to increase in the future. There is also a gain in the housing starts which is expected to
increase in 2014 and 2015. The long term demand for housing starts are estimated to increase 1.5M units per year.
Investment Summary
The BUY recommendation we are placing on the stock is due to the EBIAT estimates which are
forecasted to grow from 2014 onwards. There is an upside potential of an 18% holding period
return, with an estimated stock price of $213. The company’s earnings and growth rate give
them an enterprise value of $31,395M based on our estimates. Mergers and acquisitions offer
chemical companies another means to shore up growth in a still challenging economic scenario.
With PPG’s acquisition of Akzo-Nobel’s Architectural coatings business, this would prove to a
good step forward for the company which can affect the sales and profitability, the divestures
and acquisitions for 2013, boosted sales growth by 10.1% approximately. PPG's rising EPS
followed by an increase in net income of 9.8% in 2013, helps us in understanding the company
better and issue a buy recommendation. We estimate PPG’s EPS to be $9.32 versus $8.28 from
the previous year, driven by an increase in profit margins and better cost efficiency. The net
profit margin for PPG increased to 7.4% in 2013 from 5.7% in 2012, this is attributed to the cost
cutting measures and in expanding their top line coatings segment. We estimate the P/E ratio
of PPG to be 19.39 for the fiscal year 2014. The P/E ratio of 22.57 from 2013 indicates a better
value, but this puts PPG in a stable position as they below the industry average of 35, indicates
that PPG is more of a value company than growth company. This show a stable market sentiment
relating towards value companies. The Sales CAGR of PPG is 5.5 % for the years 2013-2018 based
on our estimates, driven by architectural acquisition, aerospace space, foreign automobile
improvement, housing prospects, and marine & protective coatings.
Valuation Method:
Sales and other factors, are discounted to the WACC which is estimated to be 9.3%. There was
also a mid-year discount factor that was used in our analysis, because assuming all cash flows occur at the year is illogical. The DCF model we
built has 4 operating scenarios and a Base case scenario. We derived 4 different values in each case scenario and averaged the final value
based on the Scenario. The 4 different scenarios, highlighted different growth rates and economic and segment growth rate was also included.
Margins and Profitability: PPG has a gross margin of 42% which is slightly higher than the industry average of approximately 40%. PPG, Ecolab
Inc. (ECL) and Sherwin Williams Paint Company (SHW), all have higher gross margins above the 40% range. But PPG has maintained the
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industry average, and will look to improve these margin the future. Especially with the cost cutting
measures and better operating efficiency, which the company plans to accomplish in 2014. PPG has a
current Operating margin (OM) of 11.4% per dollar of sales, which is slightly higher than their OM in
2012 which is 9.72%. This indicates that the company is effectively managing their fixed assets. Overall
PPG has positive margins and profitability, this in fact is a clear indication of the how the company is
performing in terms of the per dollar sales. The company’s ROA increased to 7.64% from 5.70% in
2013. This is indicative of the company’s operating efficiency. The company’s ROI also increased form
7.59% to 10.46% in 2013, this indicates the strong management decisions involving debt and
acquisitions.
Financial Strength and Position
PPG has a current ratio of 1.90 which is better than its competitors Sherwin Williams (SHW) and Pixair
Labs which have current ratio of 1.60 and 1.00, these figures are in the higher ranges for PPG. The LT
Debt/equity of 0.65 is really a solid figure comparing that with SHW and Pixair Labs, who have a lot of
debt, and this could become a potential threat to these companies. The Quick ratio of the company
is also very good compared to its competitors, PPG has a quick ratio of 1.40, which is better than SHW
and Pixair Labs. The liquidity of PPG is better than their competitors which is beneficial because they
pay debt easier and finance new activities.
Chemical sector Prospects:
The housing market is one of the key consumers of the Chemical Industry and the outlook seems to be bright going forward in the future as
Housing starts estimates are forecasted to rise in the 2014 according to American Chemistry Council estimates. Overall, specialty chemical
companies are demonstrating mixed results depending on the portfolio of assets and the end markets they serve. Companies without
significant product differentiation focus their business models on low-cost manufacturing. These companies are affected by the cyclicality of
the economy and are vulnerable to raw material price fluctuations and their impacts on revenue and profits. These companies have to improve
their operational excellence and economies of scale, as well as try to manage the balance sheet carefully in the current complex operating
environment. The prospect for growth is moderate, looking forward into the future of these companies. PPG’s cost cutting measures and
higher profit margins indicates a better prospect for the company within the industry.
Mergers and Acquisitions
Mergers and acquisitions offer chemical companies another means to shore up growth in a still challenging economic scenario. These
companies remain focused on exploring growth opportunities in the fast-growing emerging markets, particularly in the lucrative regions of
Asia-Pacific and Latin America (especially China and Brazil). PPG will look to capitalize on the current trend, with the last year’s acquisition of
Akzo Nobel’s Architectural coatings business, the company will look to grow its earnings in 2014 as well by means of Divestures and
acquisitions(D&A) which contribute to a significant percent of sales every year, this is part of the company strategy. The company generated
300 million in sales from the architectural coatings business of AkzoNobel. In 2013, the company made 2 D&A’s and in 2012, it made 4.
PPG Industries Event Charts (Major M & A activity)
Date Event Type Event Description
1 29-Jul-13 Deal Activity Essilor International SA agreed to acquire the two optical products
2 11-Apr-13 Deal Activity PPG Industries Inc. acquired Deft Inc for an undisclosed amount
3 14-Dec-12 Deal Activity PPG Industries Inc. acquired the business and assets of Akzo Nobel.
4 17-Oct-12 Deal Activity PPG Industries Inc. acquired Spraylat Corp for an undisclosed amount
5 19-Jul-12 Deal Activity Georgia Gulf Corp completed its acquisition of the business and assets
6 31-Jan-12 Deal Activity Safic-Alcan SA, a subsidiary of ING Parcom Private Equity SAS.
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Valuation:
DCF Method: We used the DCF method because this method was the most appropriate for a well-managed and solid company in terms of
revenue. It’s a better estimate to know how much of a good investment the company will be, by discounting the cash flows back to the
present. The projection period of the Model spans for 5 years, and we discounted it by the WACC. The main factors affecting the Free cash
flow of the company are its Sales, COG’s and CAPEX, and NWC.
Sales Assumptions:
The main assumptions that impacted sales where the price, volume, FX and Acquisitions
&Divestures. Our DCF model is based on these primary assumptions. According to PPG’s Fourth
Quarter Reports, the sales for 2013 were mainly affected by a 1.4% increase in price, 0.1% increase
in volume, 0.2% increase in currency (Euro-Dollar Conversion rate) and 10.1% increase in
Acquisitions and divestures. To be mostly noted here is the 10.1 % increase in the divestments
and Acquisitions, which PPG makes year to year. From 2009 to 2013, PPG’s sales have been
greatly benefited from this factor. The divestment activity on 29-July-13 which attributed to Essilor
International SA which agreed to acquire the two optical products from PPG which gave Essilor,
a 49 percent stake in the Transitions Optical Joint Venture. The Enterprise value of the Joint
Venture was valued at 3.4 Billion. PPG’s acquisition of the Akzo Nobel’s architectural coating
business, proved to boost the revenues for 2013, by $300 Million.
The main focus and thought process in analyzing these four factors were, that we wanted to get
a deeper insight on how prices will be affected in the future. For the Price forecast, we took the
Production Price Index (PPI) for Commodities that focused on chemical prices. Using this Index
we forecasted the future prices of Chemicals, the main focus was to find the CAGR of chemicals
and how it will be affected in the future. For more on the CAGR chart refer to the Appendix. From
2012 to 2013, there was a 1 % change in the PPI, but in 2014 we predict that the number will grow
to 3% and this will bring benefit to the overall sales, but also the costs would increase. In 2013,
the PPI stands at 279.4, but in 2014 we predict these number to go at 286.72. This 3% growth rate
in prices for chemicals was used in our analysis, when calculating the growth rate for 2014. Then
the next factor was the volume, which we used the past years average volume estimates and
averaged it out based on the estimates, we estimated a 0.75% increase in volume, the main focus
for our assumptions was that the situation in Europe is supposed to get better in 2014 after the almost certain end of the Greek recession
which affected sales in 2013 for the European segment of PPG’s business. Due to better situations of the Euro crisis in 2014, the Euro will gain
against the Dollar and this could increase the sales of PPG. We forecasted the Euro-Dollar exchange rate, from the year 2014-2018 and added
a .15% increase in sales due to this factor. Lastly, the Acquisitions and Divestures played a crucial role in 2013, with nearly 10.1 % in sales, but
this factor is difficult to predict for the future years. We took the average of Acquisitions and Divestures impact on sales for the year 2009-
2013 and found a CAGR of 1.3% which we added for the years 2014-2018. The final sales assumptions for the years 2014-2018, were made on
these four factors added. For the year 2014, we added 3%, 0.75%, 0.15% and 1.3% giving an overall sales growth rate of 4.82% for 2014. For
the remaining years 2015-2018, only the price assumptions where different, but the volume, FX and Acquisitions and Divestures remained the
same. For the years 2015, there was a 6.76% increase in sales, 2016 there was a 6.18% increase in sales, 2017 there was a 4.73 % in sales and
in 2018 there was a 5.13% increase in sales. These increases contribute to the solid earnings potential of the company and our positive outlook
of the overall economy. The overall world GDP will increase, further causing a shift in the sales and profitability of chemical companies
worldwide, with the focus shifting towards emerging markets. For a more detailed explanation of the DCF model, refer to the appendix. The
COG’s assumptions were also based on the assumptions of sales, the COG’s also increased according to the factors of sales.
The depreciation and Amortization assumptions for the years 2014-2018 where kept constant at 3.2% for the years 2014-2018 We took the
average of the D & A for the years 2009-2013 and estimated the value to be 3.2%. The CAPEX assumptions where also kept constant for the
years 2014-2018 at 3.0 % these values were estimated by taking the average CAPEX for the year 2009-2013. As this company’s CAPEX had not
changed much from 2009. This assumption would be a better measure of estimating the CAPEX. In the future, if the company plans to spend
a lot more on CAPEX these assumptions would be adjusted for the growth rate in sales, which are estimated at higher numbers for the coming
years. There is generally a positive outlook on the sales going forward in the future.
FCF: The free cash flow estimates based on our assumptions were positive for the company. This proved that the company will be able to
generate value for its shareholders. We use the Mid-Year convention for the accuracy of the analysis based on our cash flows. There was also
a discount factor based on the WACC which we assumed to be 9.3 %. The decrease and increase in the FCF where mainly attributed the Net
Working capital assumptions which would increase and decrease the FCF based on our assumptions.
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Net Working Capital: Our net working capital assumptions for Current assets were based on the
Days sales outstanding and days of inventory held in hand for our current assets. The current
liabilities were based on Days payables outstanding, accrued liabilities (% of sales) and other
current liabilities (% of sales). The values were averaged based on the previous year’s
assumptions.
WACC: For the WACC, we first analyzed the comparable company’s unlevered beta, took their
Market value to debt and Market value to equity and analyzed their unlevered beta. The
comparable companies in the analysis where, Sherwin-Williams Paint Company (SHW), Dow
Chemical company (DOW), Ecolabs Inc. (ECL), Sigma-Aldrich Corporation (SIAL) and Rockwood
Holdings (ROC). The Cost of Debt was assumed to be 6.7 % based on Average of long term debt
outstanding for PPG. We relevered PPG industries beta based on the industry average beta which is 0.82. This provides us a more accurate
measure of the risk of the company relative to the Market. The comparable companies, also provide, a deeper insight into riskiness of the
whole specialty chemical market. In the cost of equity calculation, the four step mainly included the risk free rate of 3.5% which was from the
20-yr US treasury. The market risk premium of 6.0% was assumed based on Ibbotson SBBI Valuation Yearbook. These numbers provide a
much more accurate insight on market risk. The need for investors to be compensated has been taken into consideration heavily in the
calculation of the WACC. There was also a size premium assumption that was taken for the default of smaller firms, this number was assumed
to be 2% based on the average estimates of previous years.
Scenarios: There were 5 scenarios that were taken in this DCF method. The first scenario was the Base case scenario, which assumed all the
growth rates for sales as mentioned earlier. The second case was 1% upside, the third case for 1% downside. The fourth case assumed a 2%
increase, which took into consideration of segment wise volume increase, and less riskiness overall based on the economy. The last scenario
assumed a 2% decrease from the base case, based on the assumption of poor economic cycle and lower growth rates in price and volume.
The final implied share price of the company was based on the average of the 5 scenarios and this number was $213.08 per share. The
assumption for the no of shares outstanding was 142 million and with an Enterprise value of $31,395.4M and an implied Equity value of
$30,294M less debt.
Financial Analysis
Earnings growth: The year 2013 for PPG has been a financially good year, with the net income increased by 11.7% (from $941 to $1034). This
increase in net income is mainly due to the acquisitions and divestures which contributed to 10.1% of the overall sales in 2013. PPG has had a
rise in its Net Margin in the past five years have increased from 2.75% in 2009 to 6.84% in 2013. The price to earnings ratio for 2013 is 22.57,
which shows the market believes PPG’s earnings will keep growing in the future. The
acquisitions and divestures of 2013 (AkzoNobel’s architectural coatings business) have resulted
in the impressive earnings. However for the year 2014 we forecast an increase in the sales
figures with PPG moving towards emerging markets like India. The emerging markets give an
advantage of low cost which will help PPG to increase its sales. According to the Production
Price Index for specialty chemicals, we forecast that the price of chemicals will go up in the
near future which will increase both the revenue and cost of goods sold. The PPI index currently
stands at 279.4 but is said to increase to 286.72. As shown in these estimates the demand of
chemicals are increasing in emerging markets there is no surprise that China recently took over
America as the largest chemical manufacturer. The emerging markets segment of PPG has
seen a 10% increase in 2013 from the previous year. The long term focus of the company will
be to increase the EBIDTA which in 2014 is roughly 1.48 B$. The average forecasted growth
rate for EBIDTA is approximately 6.4% for the years 2014-2018. Another important driver for
the chemical business is the R&D which has been constant at 3% of total revenue. Even with
consolidation, PPG operates and will continue to operate in their end markets providing
sustainable earnings. Since PPG is a value stock, their growth rates will not resemble those of
newer companies. Another positive signal from PPG’s P/E is that, its P/E ratio is not inflated
and should remain safer than companies that have high P/E ratios such as the technology
sector. The reasoning behind this is that most overvalued companies have high P/E ratios, and investors are starting to stray away from this.
The industry Dividend Yield is 2.29% and PPG’s is 1.3%, this will however need to improve for PPG, as they will need to increase their dividend
yield in the future. Through strong management, and promising business activities, PPG has constantly been growing their dividends. As PPG
progresses further into the future, their dividend yield will become more similar to those in their market.
Horizontal Analysis Annual Annual Annual
Period Period Period
2011 2012 2013
Description
Growth in Net Sales 10.9% 2.1% -0.6%
Cost of Goods Sold 10.3% 0.1% -4.3%
Growth in Gross Profits -0.2% -0.8% -1.4%
Growth in Interest Expense 12.4% 0.0% -13.3%
Growth in Non Operating Expenses -17.8% 383.6% -39.0%
Growth in Net Income 37.7% -12.2% 11.7%
Growth in Earnings Per Share 45.4% -13.2% 19.9%
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10. CFA Institute Research Challenge
DuPont Analysis: The Company’s ROE declined in 2013 from 23.16% to
19%, but the average 10-yr ROE remains at the 20% range, the industry
average is close to approximately 17%. When accounting measures
aren’t used to manipulate ROE by adding leverage, ROE is a good
indicator of competitive advantage. These competitive advantages
can be seen in the Net Profit Margin and Asset Turnover. Since long-
term debt either decreased or remained the same, financing was not
used to manipulate ROE from 2011 to 2013, decreases in Long-Term
Liabilities also support this. From 2012 to 2013 Asset Turnover
reduced, negatively affecting ROE. On the other hand, the Net Profit
Margin increased more than the decrease in Asset Turnover so the
net effect on ROE remains positive. We believe the Net Profit Margin
changed due to PPG’s initiative to expand its top line, coatings. From
expanding the top line, PPG experiences greater economies of scale, effectively making the cost of goods sold cheaper. Historically, the Equity
Multiplier and Tax Burden remain nearly constant. All of these factors attribute to PPG’s ROE and why it remains rather stable throughout the
years.
Ratio Analysis: PPG is improving its ratios by the years and is at a good stand when compared to the industry and its competitors. Price-to-
Sales Ratio (P/S) of PPG at 1.72 is less than the industry at 1.80. It is lower than its competitors like SHW (1.79), ROC (2.74). The lower P/S with
high profit margins and growth prospects gives PPG’s investors a better outlook on price to sales. Higher the Price-to-Book (P/B) the better
is the value of the company and PPG’s P/B is 5.07 as compared to 3.34 of the industry. It indicates the value to be paid for $1 of equity that is
weather the stock is overvalued or undervalued and in this case PPG stock is not undervalued. The Return on Assets (ROA) of PPG has been
increasing from 2% in 2009 to 19% in 2013 which indicates the good management of assets by the company. Also in comparison to SHW
(12%), DOW (6%), ECL (5%) PPG is managing its assets more effectively. PPG has been having an increasing trend in its Return on Equity (ROE)
with 9% in 2009 and 61% in 2013. This indicates that the company is good at rewarding its shareholders for their investments. As PPG keeps
buying back its shares from the market it reduces its shareholder’s equity and increases the ROE. The ROE for the Industry is approximately
17.4% and 19.01 % for PPG. These averages are a great indicator of the future earnings potential of the company. PPG has been keeping its
current ratio over 1.0 (1.67 in 2009 to 1.86 in 2013). It shows that the PPG can pay of its short-term liabilities with its short term assets without
having to face any problem. The quick ratio has also moved up from 1.24 in 2009 to 1.43 in 2013, PPG has the capability to pay off its short
term debts by its quick assets with in a day or two. The competitors are also having strong current and quick ratio but within the same average
ranges of the industry. The difference between the current and the quick ratio of PPG indicates the amount of inventory. PPG has its debt to
equity ratio is at 0.65, SHW at 1.06, DOW at 0.78, ECL at 1.07, SIAL at 0.15, and ROC at 0.55. PPG as one of the lowest debt to equity ratio and
hence shows a low risk of going bankrupted. Asset turnover ratio of PPG is managed in such a way that it has been close to 1 (0.86 in 2009,
1.03 in 2011 and 0.90 in 2013). The sales increase along with the total assets mainly due to the acquisitions & divestures made by PPG.
Growth Rate: PPG’s EPS for the year 2013 is $8.28 and is forecasted to $9.32 in 2014, $10.48 in 2015 and has an increasing trend for the next 5
years. Along with the free cash flow forecasted to increase from $1,615 in 2013 and increasing to $1,810 in 2018. Increasing EPS growth rate
with increasing free cash flow of the company indicates that the company is growing and is also increase the shareholder’s wealth. The sales
growth rate has been consistent at 4.8% from 2014 and the CAGR at 5.5% from 2014-2018 based on our estimates.
Main Risks:
Chemical Sector Risk: Over 2013, the Chemical sector produced moderate gains driven by an improving housing market, and growing vehicle
sales. According to the American Chemistry Council (ACC), the 2014 outlook on the Chemical sector looks optimistic. They believe that
American chemistry will become a faster growing industry again. Since these two areas of the Chemical sector are the main drivers, we did
further research on how they will perform in 2014. We believe the housing market will show continued improvement with lackluster results in
the early months of 2014 due to record setting weather. Mortgage rates, driven by monetary policy, should remain low with a slight growth
over the year. In 2013, housing sales, and property value increased by more than economists predicted mainly because of the easy money
policy which should continue in 2014. Another positive sign for the housing market is a decrease in foreclosures. The new regulations on
qualified mortgages are much more thorough, resulting in a stronger secondary market for reselling mortgages and improving housing equity
by making sure the mortgages are actually affordable for those who seek them. Auto sales in the first two months of 2014 failed to reach
estimates, we also believe this is mainly due to freezing weather conditions. Although January and February missed estimates, we believe
vehicle sales in 2014 will be comparable to the numbers found in 2013. According to the Chief Economist Lacey Plache, the average age of
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11. CFA Institute Research Challenge
cars on the road is rising, and used car inventories are low, so new car sales should see a rise. Lastly, even though lower income car sales are
still low, they are steadily improving from 2009’s lows.
Raw Materials Risk: PPG’s inventory is produced by a few main raw materials, oil, gas, and metals. Price fluctuations in these areas can affect
the margins at which PPG operates by causing changes in final prices and demand. Consensus estimates believe the price per gallon of oil
should remain rather stable over the coming year. Surprising cooperation by Iran should lead to less volatility along with booming US natural
gas supplies. Metal prices should move rather consistent with GDP growth in corresponding countries. Since PPG does not hedge, they will
be paying the market price. Prices in metals used in making different pigments should see a slight increase as increased demand foreign and
locally will move prices.
Monetary Policy Risk: Recently appointed Federal Reserve Chair Janet Yellen is expected to continue with the policies implemented by past
chairman Ben Bernanke. Federal stimulus should continue smoothly along the path already in place. As 2014 goes on, economic indicators
will influence her decision on tapering in tern influencing interest rates. We believe rates will remain low, but show slight increases throughout
the year causing minor corrections in the market. Improving economic factors should offset these minor corrections giving PPG some stability
in these times. Overall, as long as monetary policy moves with projections, there should not be a major effect on PPG’s stock price.
Foreign Exchange Risk: Exchange rate risks are low for PPG because PPG buys and sells locally avoiding currency exchanges. The dollar is
weaker right now than historically, and we believe the dollar will slowly strengthen over the course of the year resulting in more foreign trade.
A stronger dollar could hurt exports, but since PPG buys and sells in the operating country, the risk is minimized. A rising dollar should also
positively affect PPG’s operations in the US by resulting in more sales. A strengthening dollar should also push oil prices down, which is one
of the main raw materials used by PPG. As the value of a dollar rises, US investments should see a rise in foreign investors looking for return
pushed by company growth and value appreciation of the dollar. Overall, increasing dollar value should have a positive effect on PPG. The
risk for unfavorable currency exchange rates is low.
Global GDP Risk: Growing GDP typically shows strong trends in the housing and automotive market, if GDP were to fall, we believe these
markets will negatively affect PPG’s earnings. We predict GDP to show signs of growth in the US and abroad. If continued growth in GDP is
not realized, then we expect lackluster growth in the housing and automotive markets.
Euro-Zone Risk: With over 30% of sales coming from the euro-zone, PPG’s performance relies heavily on improvement in their economies.
According to The Economist, GDP as a whole in the euro-zone is expected to show around a 1.1% improvement in 2014. We believe this
should lead to a small growth in PPG’s sales.
Other Additional Information:
Energy and Environmental Management Approach: PG is committed to operating in a manner that is protective of people and the environment.
PPG regularly evaluates business risks as they become known and quantifiable, including climate change. The company recognizes the
importance of providing products that meet the needs of markets in the context of climate change and increased energy cost, as well as
enabling the overall benefit of reducing energy consumption and greenhouse gas generation. PPG is a major supplier of coatings, glass and
fiber glass products that enhance energy efficiency or are used in alternative energy technologies such as solar or wind power generation.
Energy and Environmental Partnerships: In December 2009, PPG joined the U.S. Department of Energy (DOE) Save Energy Now LEADER
Program, reinforcing the company’s voluntary efforts to significantly reduce its industrial energy intensity by 25 percent over the
next decade.
Employees and the Workplace: PPG understands its success as a company is linked directly to its people. Creating safe, healthy and fulfilling
workplaces for employees is critical to PPG’s future success. PPG also understands that organizations that foster inclusiveness and seek to
empower people are more innovative and more productive. With more than 38,000 employees, PPG is committed to continuing to invest in
its people and in a workplace defined by constant learning and recognition of the full diversity of ideas and individuals. At PPG, approximately
38 percent of the total workforce is employed in the United States and Canada; 41 percent in Europe, Middle East and Africa (EMEA); 18
percent in Asia/Pacific; and 3 percent in Latin America. About 41 percent of the total workforce is covered by collective bargaining agreements.
Community Involvement and Social Performance: PPG Industries Foundation
• GIVE Grants – In 2010, the PPG Industries Foundation provided more than $470,000 through the Grant Incentives for Volunteerism by PPG
Employees and Retirees (GIVE) program toorganizations in PPG communities throughout the United States. PPG’s involvement extends
beyond funding, with employees serving on organization boards, and employees and retirees serving as volunteers at these organizations
within their communities. This in turn earns eligible organizations a $500 GIVE grant if the PPG volunteer applies for one and a $1,000 GIVE
grant if the employee serves on the board of directors for the organization. A variety of U.S. community organizations benefited from GIVE
grants in 2010, including organizations in Natrium, W. Va.; Cleveland, Ohio; and Lake Charles, La.
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Appendix
Financial Statements
1. Income Statement Forecasts
2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Revenue 14885 15200 15108 15833 16910 17958 18802 19761
% change from prev year 11% 2% -0.6% 4.80% 6.80% 6.2% 4.7% 5.1%
Cost of Revenues 9081 9069 8636 9183 10146 10775 10905 11461
COGS (%) 61% 60% 57% 58.0% 60.0% 60.0% 58.0% 58.0%
Gross Profit 5804 6131 6472 6650 6764 7183 7897 8300
Gross Income (%) 39% 40% 43% 42% 40% 40% 42% 42%
Operating Expenses
Selling, General & Admin.
Expenses 3234 3335 3600 4117 4397 4669 4889 5138
SG&A (%) 22% 22% 24% 26% 26% 26% 26% 26%
Research & Development 430 455 500 500 500 500 500 500
R&D (%) 3% 3% 3% 3% 3% 3% 3% 3%
EBITDA 2140 2341 2372 2033 1867 2014 2508 2662
EBITDA (%) 14% 15% 16% 13% 11% 11% 13% 13%
Other Special Charges 0 -83 59 - - - - -
Depreciation & Amortization 467 465 474 488 503 518 534 550
D&A (%) 3% 3% 3% 3% 3% 3% 3% 3%
Operating Income 1673 1876 1034 1545 1365 1496 1974 2112
Operating Income (%) 11% 12% 7% 9.76% 8.07% 8.33% 10.50% 10.69%
Other Income and Expense
EBIT 1807 1612 1489 1545 1365 1496 1974 2112
Interest Expense 210 210 119 210 210 210 210 210
Interest Income 42 39 -43 40 40 40 40 40
Other Income 92 -12 98 90 90 90 90 90
Total Other Income 134 27 11 - - - - -
Income Before Taxes (EBT) 1597 1402 1674 1885 1705 1836 2314 2452
Income Taxes/(Credit) 385 338 333 528 477 514 648 687
Tax Rate % 24% 24% 22% 28% 28% 28% 28% 28%
Earnings After Taxes 1212 1064 1341 1357 1227 1322 1666 1765
Minority Interest Expense 117 123 122 120 120 120 120 120
Net Income From Continuing
Operations 1212 1064 1034 1237 1107 1202 1546 1645
Net Income From Total Operations 1095 941 1034 1237.26 1107 1202 1546 1645
Net Income (%) 7% 6% 7% 7.81% 6.55% 6.69% 8.22% 8.33%
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3. Cash Flow Statement
2009 2010 2011 2012 2013 2014E 2015E 2016E
Operating Activities
Net Income / Starting Line 426.00 880.00 1,212.00 1,064.00 1034 1237 1107 1202
Depreciation, Depletion &
Amortization 480.00 470.00 467.00 465.00
474 488 503 518
Depreciation and Depletion 354.00 346.00 346.00 355.00 355 355 355 355
Amortization of Intangible Assets 126.00 124.00 121.00 110.00 110 110 110 110
Other Funds 128.00 -100.00 -55.00 358.00 358 358 358 358
Funds from Operations 1,034.00 1,250.00 1,624.00 1,887.00 1,973 2080 1965 2075
Extraordinaries -- -- -- 7.00 7 7 7 7
Changes in Working Capital 311.00 60.00 -188.00 -107.00 -107 124 -61 -56
Net Operating Cash Flow 1,345.00 1,310.00 1,436.00 1,787.00 1,873.00 1980.00 1,865 2,026
Investing Activities
Capital Expenditures -239.00 -307.00 -390.00 -411.00 -450 -475 -507 -541
Net Assets from Acquisitions -26.00 -34.00 -56.00 -122.00 -300 -300 -300 -300
Sale of Fixed Assets & Businesses 43.00 26.00 33.00 42.00 42 42 42 42
Purchase/Sale of Investments 0.00 -624.00 624.00 1,082.00 2,423 2,400 2400 2400
Purchase of Investments 0.00 624.00 125.00 1,332.00 - - - -
Other Funds 19.00 -10.00 142.00 -38.00 -13 -13 -13 -13
Net Investing Cash Flow -203.00 -949.00 353.00
-
1,611.00 1700 1925 1893 1859
Financing Activities
Cash Dividends Paid -353.00 -360.00 -355.00 -358.00 -650 -750 -850 -950
Change in Capital Stock -47.00 -440.00 -777.00 30.00 -231 -231 -250 50
Repurchase of Common &
Preferred Stk. -59.00 -586.00 -858.00 -92.00
-412 - - -
Other Funds -77.00 -40.00 -109.00 -124.00 - -
Net Financing Cash Flow -1,123.00 -104.00 -1,632.00 -351.00 -1538 -981 -1100 -900
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4. Horizontal Analysis
Horizontal Analysis Annual Annual Annual
Period Period Period
2011 2012 2013
Description
Income Statement
Growth in Net Sales 10.9% 2.1% -0.6%
Cost of Goods Sold 10.3% 0.1% -4.3%
Growth in Gross Profits -0.2% -0.8% -1.4%
Growth in Interest Expense 12.4% 0.0% -13.3%
Growth in Non Operating Expenses -17.8% 383.6% -39.0%
Growth in Net Income 37.7% -12.2% 11.7%
Growth in Earnings Per Share 45.4% -13.2% 19.9%
Balance Sheet
Cash and Cash Equivalents 8.7% -10.4% 19.6%
Accounts Receivable 1.9% -0.6% 11.0%
Inventory 2.2% 5.0% 11.3%
Other Current Assets 8.6% 29.8% 14.0%
Total Current Assets -5.8% 17.1% 5.6%
Net Fixed Assets 1.3% 6.1% -5.4%
Longterm Investments -5.0% 20.9% -43.5%
Total Non Current Assets -1.4% 3.6% 1.0%
Growth in Total Assets -3.4% 9.5% 3.1%
Accounts Payable -0.9% 0.5% -38.3%
Total Current Liabilities 2.0% 20.8% 17.7%
Total Non Current Liabilities -2.5% -3.2% -7.3%
Growth in Total Liabilities -1.0% 4.9% 2.5%
Retained Earnings 8.7% 6.3% 11.4%
Sustainable Growth Rate #1 10.7% 8.3% 8.7%
Sustainable Growth Rate #2 4.4% 4.2% 3.6%
Growth in Market Capitalization -3.4% 67.6% 32.6%
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5. Vertical Analysis
Account Title 2009 2010 2011 2012 2013
Cash and Cash Equivalents 7.49% 9.04% 10.16% 8.32% 9.65%
Short Term Marketable Securities 4.52% 0.17% 7.58% 5.00% 4.25%
Accounts Receivable 18.63% 18.72% 19.74% 17.93% 19.29%
Inventory 10.98% 10.60% 11.21% 10.75% 11.61%
Other Current Assets 1.86% 1.87% 2.11% 2.50% 2.76%
Current Assets 38.97% 44.53% 43.40% 46.43% 47.56%
Net Fixed Assets 19.53% 18.10% 18.98% 18.41% 16.88%
Longterm Investments 9.25% 8.39% 8.25% 9.11% 4.99%
Goodwill 19.74% 18.33% 18.56% 17.60% 18.68%
Intangibles and Other Assets 12.51% 10.65% 10.81% 8.46% 11.88%
Non Current Assets 61.03% 55.47% 56.60% 53.57% 52.44%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00%
Accounts Payable 9.81% 10.96% 11.25% 10.33% 6.18%
Short Term Borrowings 1.93% 0.19% 0.75% 4.09% 21.65%
Income Tax Payable 0.23% 0.38% 0.36% 0.45% 0.00%
Other Current Liabilities 13.62% 13.29% 13.83% 14.02% 5.14%
Total Current Liabilities 25.60% 24.81% 26.18% 28.88% 32.97%
Longterm Debt / Borrowings 21.80% 27.25% 24.93% 21.47% 20.81%
Other Longterm Liabilities 26.00% 23.42% 26.22% 23.75% 19.84%
Total NonCurrent Liabilities 47.80% 50.67% 51.15% 45.22% 40.66%
Total Liabilities 73.40% 75.48% 77.33% 74.10% 73.63%
Other Apperciated Reserves -9.16% -9.63% -11.14% -10.18% -9.81%
Common Equity 3.43% 3.26% 3.38% 3.08% 2.99%
Additional Paid in Capital 4.30% 4.89% 5.46% 5.54% 5.38%
Retained Earnings 57.71% 57.62% 64.80% 62.91% 67.98%
Adj for Foreign Currency Transl 0.23% 0.11% -1.42% -0.44% 0.00%
Treasury Stock -29.91% -31.73% -38.41% -35.03% -40.17%
Total Equity 26.60% 24.52% 22.67% 25.90% 26.37%
Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00%
Total Revenues 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Goods Sold -65.52% -64.26% -63.94% -62.65% -60.31%
Gross Profit 165.52% 164.26% 163.94% 162.65% 160.31%
Operating Expenses -27.16% -25.13% -24.62% -24.72% -27.54%
Non Operating Expenses -2.28% -0.97% -0.72% -3.40% -2.08%
Income Before Extra Ord Items 5.04% 9.65% 10.73% 9.22% 10.07%
Net Income 3.48% 6.56% 8.14% 7.00% 7.86%
Accounts Receivable to Revenues 21.47% 20.69% 19.01% 18.51% 20.66%
Inventory to Revenues 12.65% 11.72% 10.80% 11.10% 12.43%
Other Current Assets to Revenues 2.15% 2.07% 2.03% 2.58% 2.96%
Current Assets to Revenues 44.91% 49.22% 41.80% 47.93% 50.94%
Accounts Payable to Revenues 11.31% 12.11% 10.83% 10.66% 6.62%
Short Term Borrowings to Revenue 2.22% 0.21% 0.73% 4.22% 23.19%
Other Current Liabilities to Revenue 15.70% 14.68% 13.32% 14.47% 5.51%
Current Liabilities to Revenues 29.50% 27.42% 25.22% 29.82% 35.31%
IncomeStatementBalanceSheetCurrenttoRevenues
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6. DCF Analysis
Growth Rate Assumptions:
1. Price
2. Volume
3. FX
4. Acquisitions and Divestures
Price Calculation and Forecast
The forecasted prices of the PPI, were calculated using the CAGR method the estimates for 2014-2018. The time period used for the calculation
was 5.
Series Id: WPU06
Not
Group: Chemicals
and allied
products
Item: Chemicals
and allied
products
Base Date: 198200
Years: 2003 to 2013
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2003 158.0 162.2 164.5 162.2 162.1 162.2 160.9 161.2 161.4 162.1 162.1 163.1 161.8
2004 166.6 167.5 168.0 170.1 170.9 172.2 173.7 176.5 179.4 181.0 183.0 183.9 174.4
2005 185.5 186.4 188.9 189.0 188.4 187.2 189.3 189.9 194.9 202.3 201.4 201.3 192.0
2006 203.7 203.4 203.4 203.1 205.7 207.9 208.3 209.8 207.6 206.9 204.5 205.3 205.8
2007 206.0 206.7 208.8 210.7 213.7 215.0 217.1 215.0 216.7 218.9 224.5 224.7 214.8
2008 229.2 231.3 235.6 240.4 246.5 252.7 262.8 263.3 264.2 252.5 239.3 227.6 245.5
2009 226.8 226.5 225.8 225.2 225.8 227.8 230.0 231.1 232.0 231.7 233.3 236.7 229.4
2010 239.9 244.2 246.1 248.9 246.9 244.1 243.3 244.3 245.8 248.8 252.1 254.7 246.6
2011 262.2 267.3 270.3 276.4 280.6 279.7 280.5 280.1 280.9 277.2 274.9 271.1 275.1
2012 275.3 278.1 283.0 283.9 281.5 273.9 273.0 273.6 274.6 275.1 273.5 273.7 276.6
2013 279.2 283.8 282.4 280.5 280.6 280.8 279.8 279.0 278.1 276.9 274.9 276.3 279.4
Producer Price Index-Commodities
Original Data Value
PPI Annual Prices Forecast
Year Number %Change
2008 245.5 Actual
2009 229.4 -7% Actual
2010 246.6 7% Actual
2011 275.1 12% Actual
2012 276.6 1% Actual
2013 279.4 1% Actual
2014 286.72224 3% Estimate
2015 299.80231 5% Estimate
2016 311.74777 4% Estimate
2017 319.64352 3% Estimate
2018 329.02482 3% Estimate
2019 339.96101 3% Estimate
2020 351.74073 3% Estimate
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Volume:
The volume estimates were based on the 2013 volumes. We predict that the volume sales in these regions will improve, mainly due to the
divestures and acquisitions business of the company. The average of the 2013 Volume sales were taken. There was also a 4 % decline in the
European volume sales, we believe that this sentiment could improve as the Greek crisis, coming to an end. But there is also a level of
uncertainty that exists.
FX
The Euro-Dollar spot exchange rate was used in our calculation and Forecasted using the CAGR method.
Acquisitions and Divestures
The acquisitions and Divestures are hard to predict, so we averaged the CAGR for the Past five year Acquisition’s and Divestures. This value
was estimated to be about 1.3 %
A Chart showing how we arrived at our final growth rates:
Note: The .15 % increase in FX, was to keep the risk and other factors stable. For years 2009-2013, PPG’s sales was
influenced by approximately .15% in FX.
FX
Euro-Dollar CAGR
2018 1.334444598 -0.1%
2017 1.336060628 -1.0%
2016 1.34892981 0.8%
2015 1.33827599 -0.2%
2014 1.340983628 1.0%
2013 1.328 3.3%
2012 1.2858 -7.7%
2011 1.3924 4.9%
2010 1.3275 -4.8%
2009 1.3942 -5.2%
2008 1.4709
Average CAGR
Change 2013-
2018 0.10%
Year Price Volume FX Acqu
Sales
Growth
Rate
2009 -6.56% -17.90% 0.15% -6.50%
2010 7.50% 5.03% 0.15% 0.44%
2011 11.56% 0.10% 0.15% 0.63%
2012 0.55% 1.10% 0.15% 1.67%
2013 1.01% 0.10% 0.15% 10.10%
2014 2.62% 0.75% 0.15% 1.3% 4.82%
2015 4.56% 0.75% 0.15% 1.3% 6.76%
2016 3.98% 0.75% 0.15% 1.3% 6.18%
2017 2.53% 0.75% 0.15% 1.3% 4.73%
2018 2.93% 0.75% 0.15% 1.3% 5.13%
5-Yr
Average
s 3.33% 0.75% 0.15% 1.3% 27.63%
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22. CFA Institute Research Challenge
Net Working Capital Assumptions
WACC Analysis
->Calculated using the Average L-T debt for PPG
->Calculated using the Marginal Tax Rate (Industry Average)
Assumptions
Current Assets
Days Sales Outstanding 75.5 69.4 67.5 66.1 70.0 70.0 70.0 70.0 70.0
Days Inventory Held 68.8 63.2 67.9 77.1 69.0 69.0 69.0 69.0 69.0
Prepaids and Other CA (% of sales) - % - % - % - % - % - % - % - % - %
Current Liabilities `
Days Payable Outstanding 61.5 65.4 64.9 64.9 65.0 65.0 65.0 65.0 65.0
Accrued Liabilities (% of sales) 9.2% 8.9% 4.8% 5.4% 6.0% 6.0% 6.0% 6.0% 6.0%
Other Current Liabilities (% of sales) 5.1% 4.4% 8.3% 8.3% 8.5% 8.5% 8.5% 8.5% 8.5%
WACC Calculation
Target Capital Structure
Debt-to-Total Capitalization 49.5%
Equity-to-Total Capitalization 50.5%
Cost of Debt
Cost-of-Debt 6.7%
Tax Rate 30.0%
After-tax Cost of Debt 4.7%
Cost of Equity
Risk-free Rate (1) 3.5%
Market Risk Premium (2) 6.0%
Levered Beta 1.39
Size Premium (3) 2.00%
Cost of Equity 13.8%
WACC 9.3%
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23. CFA Institute Research Challenge
Risk Free Rate: 20-Yr US Treasury
Market Risk Premium: Source, IBBOTSSON Average Equity Risk Premiums 2013
Size Premium: A return compensation factor, for small firms within the industry if they default. This benefit would impact PPG’s overall
return.
Predicted Levered Beta: This number was taken at the company beta
Comparable companies:
Sherwin-Williams Paint Company (SHW): The Company develops, manufactures, distributes and sells paint, coatings and related products to
professional, industrial, commercial and retail customers. Its segments include paint stores group, consumer group and global finishes group.
Dow Chemical Co. (DOW): The Company is a manufacturer and supplier of products used primarily as raw materials in the manufacture of
customer products and services. It serves industries including appliance; automotive; agricultural; building and construction & among others.
Ecolabs (ECL): The Company develops and markets cleaning and sanitizing premium programs, products and services for the hospitality,
foodservice, healthcare, industrial and energy markets.
Sigma-Aldrich Corporation (SIAL): The Company is a life science and high technology company that develops, manufactures, purchases and
distributes the range of high quality chemicals, biochemical and equipment available throughout the world.
Rockwood Holdings, Inc. (ROC): The Company is a developer, manufacturer and marketer of value-added specialty chemicals and materials
used for industrial and commercial purposes.
WACC Sensitivity Matrix
Comparable Companies Unlevered Beta
Predicted Market Market Debt/ Marginal Unlevered
Company Levered Beta (4) Value of Debt Value of Equity Equity Tax Rate Beta
SHW 0.62 $1.9 $1.8 105.6% 34.0% 0.37
DOW 1.77 18.6 20.0 93.0% 33.0% 1.09
ECL 0.57 7.3 6.8 107.4% 32.0% 0.33
SIAL 0.75 0.4 2.7 15.3% 30.0% 0.68
ROC 2.27 0.5 1.0 50.0% 25.0% 1.65
30.8%
Mean 1.20 74.2% 0.82
Median 0.75 93.0% 0.68
PPG Industries Relevered Beta
Mean Target Target
Unlevered Debt/ Marginal Relevered
Beta Equity Tax Rate Beta
Relevered Beta 0.82 98.0% 30.0% 1.39
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24. CFA Institute Research Challenge
7. EPS and DPS Calculation (Our Estimates)
CAGR Calculation (5Yr and 3Yr)
Projected Company Data Using Historical Earnings Growth Rate
Return on Equity: 25.1%
Payout Ratio: 34.2%
P/E Ratio-High: 18.2
P/E Ratio-Low: 11.6
P/E Ratio: 14.9
Sustainable Growth 16.5%
Five Year Averages
Historical Company Data
Payout
Year EPS DPS BVPS High Low High Low ROE Ratio
2008 4.59 2.09 20.30 69.89 35.84 15.2 7.8 22.6% 45.5%
2009 2.94 2.13 22.65 62.31 28.16 21.2 9.6 13.0% 72.4%
2010 5.18 2.18 22.68 84.59 57.65 16.3 11.1 22.8% 42.1%
2011 6.87 2.26 21.39 97.81 78.75 14.2 11.5 32.1% 32.9%
2012 7.94 2.34 26.46 128.42 83.27 16.2 10.5 30.0% 29.5%
2013 8.28 2.42 30.00 190.07 128.20 23.0 15.5 27.6% 29.2%
Price P/E Ratio
Year EPS DPS
Current $8.28 2.83
2014E 9.32 3.19
2015E 10.48 3.59
2016E 11.80 4.04
2017E 13.27 4.54
2018E 14.94 5.11
2019E 16.81 5.75
2020E 18.91 6.47
2021E 21.28 7.28
2022E 23.95 8.19
2023E 26.94 9.22
EPS DPS BVPS High Price Low Price
Annually Compounded Rates of Growth (5 year)
12.5% 3.0% 8.1% 22.2% 29.0%
Annually Compounded Rates of Growth (3 year)
16.9% 3.5% 9.8% 31.0% 30.5%
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