After Record Sales, Which Paint Stocks Should You Buy?

After Record Sales, Which Paint Stocks Should You Buy?

Paint sales are highly leveraged against the global economy, which is showing signs of a slow but steady recovery, especially in the U.S. In fact, the U.S. is performing better than Europe, with increases in demand in construction, housing, and autos, which represent end markets for paint producers and distributors. Meanwhile, volume in Europe is still down about 20% versus pre-recession levels.

For now, having a strong presence in other regions, especially North America, is key. Three companies are looking to get a bigger piece of this market.

Record sales
Well-known Sherwin-Williams manufactures, distributes, and sells paint products primarily in the Americas.

Third-quarter earnings rose year-over-year on the back of higher volume for paint sales and contributions from acquisitions. Net sales grew 9.4% to a record $2.85 billion, which makes things look encouraging.

Sherwin-Williams was executing a plan to expand operations geographically and grow through acquisitions. But, unfortunately, what was supposed to be the company's largest acquisition ever, got frustrated. Its $2.34 billion purchase of Mexico's leading paint company, Consorcio Comex, was denied by the Mexican Federal Competition Commission. Given the circumstances, the company will evaluate its options, including whether or not to refile with the commission. However, the takeover of Comex's U.S. and Canadian operations has been secured.

Expanding its position in Mexico, where store count is low, was a good initiative and it is unfortunate to hear that it will not become a reality, at least not yet. Nonetheless, the expansion of the architectural business in America through Comex, which added 306 stores, should help Sherwin-Williams gain market share in the mid-term. However, integration costs associated with this operation are expected to impact the company in the next quarter.

Record sales driven by U.S.
Valspar is a big manufacturer and distributor of paints and coatings. Just like Sherwin-Williams, Valspar's fourth quarter posted record $1.1 billion net sales, with strong performance in the U.S. The coatings segment, however, did not perform as well, and grew 5% in the quarter and 2% for the year.

The acquisition of Ace Hardware's paint manufacturing assets in January is poised to continue boosting Valspar's retail foothold in the U.S. In fact, net sales increased 12% in the country this quarter. The company recently extended its retail paint program with its single biggest customer, Lowe's, which accounts for almost 10% of Valspar's sales. This initiative will increase the company's market share within professional painters and help business continue growing in the country.

Regarding Europe, the recent acquisition of Italian company Inver Holding will help Valspar expand its presence in the $6 billion European industrial coatings business, which is encouraging.

Coatings showing the way
PPG Industries , by purchasing AkzoNobel's North American architectural coating business, has become the world's largest producer of coatings. The company posted good results for its third quarter, with net sales reaching $4 billion, up 17% versus the prior-year quarter. Aerospace and automotive coatings remained the most consistent growth drivers.

PPG's clientele is very diversified, but its coating products, which are used to cover everything from kitchen walls to airplanes, represent more than 90% of the company's net sales. The specialty coatings, in particular, require special attention since production and development is characterized by a tight relationship with customers. This allows PPG to compete more on quality rather than price in this arena, and to pass through a larger portion of raw material cost increases. Considering the fact that specialty coatings comprise 60% of the coating business, it's good news.

Despite the company's substantial reduction in ongoing cost structure, its exposure to Europe remains relatively high, and it could be a drag if the markets there do not improve.

Bottom line
Sherwin-Williams's expansion in the short term is limited, following its frustrated Comex acquisition. Despite this result, the company's record sales, operations, and performance are positive signs to consider.

Valspar is becoming a strong competitor for Sherwin-Williams in the U.S., and is also gaining a strong foothold in other markets. Performance in the general industrial markets, however, should be monitored.

PPG's geographic and product diversification helps the company withstand price variations and international headwinds. If business in Europe improves, this company is the one positioned to profit from it the most.

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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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