PPG Industries is experiencing notable margin headwinds, international tobacco giant Philip Morris has experienced solid total volume performance in 2018, and Invesco continues its pursuit of a significantly larger ETF business.
By Kris Rosemann
PPG Industries (PPG), one of our favorite chemicals companies on a fundamental basis, has experienced notable selling pressure in recent weeks as a result of its preliminary third quarter results released October 8. It noted a number of headwinds to its bottom-line, despite selling prices increasing for the sixth consecutive quarter in the third quarter of 2018. Cost inflation was the highest since the “cycle began two years ago,” a reference to the beginning of the rebound in energy resource pricing, a key consideration for chemical companies. Not only have higher epoxy resin and crude oil prices impacted PPG’s bottom line, but so too have logistics costs, resulting from tight labor and driver markets and higher fuel costs.
Not only are cost headwinds present, but PPG is seeing a softer demand environment in China, increased industrial production volatility, and inconsistent growth in emerging markets. The company continues to expect positive global economic growth but is now building in expectations for continued volatility in demand for its products. PPG is working to recover its operating margins via ongoing pricing action, an acceleration of restructuring actions, and disciplined cost management. We like the company’s free cash flow generating capacity, which drives its impressive Dividend Cushion ratio of 2.6, and its track record of more than 45 consecutive years of dividend increases speaks for itself. Shares yield more than 1.9% as of this writing.
Shares of international tobacco giant Philip Morris (PM) shot higher after its third quarter report revealed a slower than expected decline in cigarette shipment volume. The company’s total shipment volume grew in both the third quarter and year-to-date period thanks to the ongoing growth of heat-not-burn products and reasonably solid performance from combustible products. Worldwide in-market sales of heated tobacco products are expected to almost double in 2018, and total market share advanced 0.5% in the third quarter. Management expects currency-neutral earnings per share growth of 8%-9% in the year, which should continue to drive dividend growth for the company. Philip Morris’ Dividend Cushion ratio currently sits below 1, due in part to its massive dividend obligations, but shares yield more than 5.1% as of this writing.
Invesco (IVZ) has agreed to acquire MassMutual’s OppenheimerFunds for common and preferred shares that will result in MassMutual owning 15.5% of Invesco. The deal will make Invesco the 13th largest global investment manager and sixth-largest US retail investment manager, and the move is aimed at “enhancing the company’s ability to meet client needs through its comprehensive range of high-conviction active, passive and alternative capabilities.” As of April 2018, Invesco was the fourth-largest ETF issuer when it purchased Guggenheim Investments’ ETF business, which it then slashed fees on a number of funds as it works to catch up to behemoths such as BlackRock (BLK), Vanguard Group, and State Street (STT). This is only another step in the ongoing price wars taking place within the passive investing space as we expect fee reductions to be one of the key portions of Invesco’s perception of meeting client needs.
Chemicals – Broad: APD, ASH, CE, DWDP, ECL, EMN, FUL, HUN, LYB, PPG, PX
Tobacco: BTI, MO, PM, SWM, VGR
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.