(PPG-NYSE) SUMMARY. Risk Level *

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1 January 19, 2015 PPG Industries Inc. Current Recommendation Prior Recommendation Neutral Date of Last Change 01/19/2015 Current Price (01/16/15) $ Target Price $ SUMMARY DATA OUTPERFORM (PPG-NYSE) SUMMARY We are upgrading our recommendation on PPG Industries to Outperform following its forecast-topping fourth-quarter 2014 results. Adjusted earnings for the quarter topped the Zacks Consensus Estimate. Revenues rose year over year and surpassed expectations on gains across the aerospace and automotive refinish businesses. Reported profit, however, slid on hefty debt refinancing charges. Going forward, the company will remain committed to effectively deploying cash on further earnings-accretive opportunities. PPG Industries has a diversified base of products and markets, and looks to grow its businesses strategically along with controlling costs. Healthy momentum across automotive OEM and aerospace markets and continued demand recovery in Europe are expected to support its results moving ahead. The company should also continue to gain from synergies from acquisitions. 52-Week High $ Week Low $ One-Year Return (%) Beta 1.23 Average Daily Volume (sh) 700,504 Shares Outstanding (mil) 139 Market Capitalization ($mil) $32,023 Short Interest Ratio (days) 1.58 Institutional Ownership (%) 70 Insider Ownership (%) 1 Annual Cash Dividend $2.68 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.8 Earnings Per Share (%) 19.0 Dividend (%) 4.5 using TTM EPS 23.6 using 2015 Estimate 20.4 using 2016 Estimate 18.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Chem-Diversifd Zacks Industry Rank * 224 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,331 A 4,095 A 3,980 A 3,702 A 15,108 A ,636 A 4,082 A 3,935 A 3,707 A 15,360 A ,775 E 4,479 E 4,343 E 3,645 E 16,242 E ,877 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.58 A $2.45 A $2.44 A $1.81 A $8.28 A 2014 $1.98 A $2.83 A $2.82 A $2.11 A $9.75 A 2015 $2.36 E $3.29 E $3.24 E $2.42 E $11.31 E 2016 $12.52 E *Note: EPS in 2014 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW PPG Industries Inc. (PPG), incorporated in Pennsylvania in 1883, is a global supplier of paints, coatings, chemicals, specialty materials, glass, and fiber glass. The company has manufacturing facilities and equity affiliates in about 70 countries. PPG Industries sells its products primarily through company-owned stores, home centers, mass merchandisers, paint dealers and independent distributors in the U.S., Europe and Asia. PPG Industries has restructured its reportable business segments from the earlier five segments of Performance Coatings, Industrial Coatings, Architectural Coatings - Europe, Middle East and Africa (EMEA), Optical and Specialty Materials and Glass to three segments: Performance Coatings, Industrial Coatings and Glass. Each of the business segments in which PPG Industries is engaged is highly competitive. However, the diversification of the product lines and worldwide markets tends to minimize the impact on PPG Industries total sales and earnings are due to changes in demand for a particular product line or a particular geographic area. Performance Coatings: The division comprises refinish, aerospace, architectural coatings Americas and Asia Pacific, architectural coatings EMEA, and protective and marine coatings operating segments. This reportable segment primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, as well as transparencies and transparent armor. PPG Industries is a major global supplier of protective and decorative coatings. Industrial Coatings: The segment consists of the automotive OEM coatings, industrial coatings, packaging coatings, and the specialty coatings and materials operating segments. This reportable segment primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas and other specialty materials. 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 glazings and fiber glass businesses. The company s major markets are commercial and residential construction and the wind energy, energy infrastructure, transportation and electronics industries. Most glass products are sold directly to manufacturing companies. PPG Industries manufactures flat glass by the float process and fiber glass by the continuous-strand process. PPG Industries, on December 5, 2012, forged a global technology license deal with China-based Henan Billions Chemicals Co., Ltd., which provided the latter the rights to use the company s technology for making chloride-grade titanium dioxide (TiO2), a key raw material used in the paint and coatings industry. Henan Billions, which has annual sales of roughly $300 million, makes and distributes TiO2, zirconium and aluminum sulfate. It currently supplies sulfate-grade TiO2 to PPG Industries. The agreement concludes the license of PPG Industries chloride-based technologies as announced by both companies in June The deal is expected to boost the supply of chloride-grade TiO2 globally and offer a commercial opportunity for PPG Industries technologies. Earlier, the company manufactured TiO2 using the chloride process at its chemicals facility in West Virginia. PPG Industries, in Jan 2013, spun off its commodity chemicals business to Georgia Gulf Corp., now known as Axiall Corporation (AXLL), for $2.1 billion. The business has been reported as discontinued operation. Equity Research PPG Page 2

3 PPG Industries, in Jun 2013, entered into a long-term supply agreement with and Argex Titanium Inc., under which, PPG Industries agreed to provide continued research and development support to develop and optimize TiO2 for paints and coatings. The collaboration sees the combination of PPG Industries coatings technology and expertise with Argex s TiO2 proprietary processing technology. PPG Industries, in July 2013, agreed to sell its majority stake in Transitions Optical to ophthalmic lenses giant Essilor International, thus ending its 23-year investment in the joint venture. Transitions Optical, which was formed in 1990, is a leading supplier of photochromic lenses to optical makers globally. PPG Industries held a 51% stake in the joint venture with Essilor owning the balance. The total enterprise value of the transaction is around $3.4 billion with PPG Industries receiving $1.73 billion (pre-tax) or around $1.5 billion (post-tax) in cash, subject to certain adjustments. The transaction closed on March 31, Essilor also bought PPG Industries optical sunlens business. It will also enter into multi-year deals with PPG Industries, under which, the latter will continue to supply optical dyes and research and development services. All sales related to Transitions Optical have been consolidated in PPG Industries financial statements. PPG Industries recorded revenues of $15,360 million in 2014 with Performance Coatings, Industrial Coatings, and Glass divisions accounting for 57%, 36% and 7%, respectively. REASONS TO BUY PPG Industries has a diversified business, both in terms of products offered and geographical presence. It has a leading position in several paints and coatings end markets. The company derived nearly a third of its revenues from emerging regions. This enables it to deliver growth to shareholders by tapping opportunities in fast growing regions. Moreover, the geographical mix has helped the company to lessen the impact of economic headwinds faced by it in a particular region, enabling it to grow its business by mitigating weakness in one region by growth in others. The company expects recovery across its end markets to continue. Majority of economic sectors in North America, one of its largest regions, are expected to exhibit improvement led by improved industrial and chemical production activity. The company is seeing strength in the North American automotive OEM and aerospace markets. PPG Industries is also taking steps to grow its business inorganically. The company acquired the coatings business of Colpisa in 2012, thereby expanding its footprint in Colombia and Ecuador. As a result of this acquisition, PPG Industries is now the only major coatings supplier with a direct automotive OEM coatings manufacturing business in Colombia. It also acquired European coatings company Dyrup A/S. The acquisition expanded PPG Industries European architectural coatings business by extending its geographic presence in the region and by bolstering its wood care product offerings. Moreover, the purchase of industrial coatings company Spraylat Corp. boosted its position in automotive parts and architectural powder coatings. PPG Industries, in April 2013, closed the acquisition of the North American architectural coatings business of Dutch paints company AkzoNobel, N.V. (AKZOY) for $1.05 billion. The North American business, which markets the Glidden paint brand in the U.S., offered around 600 paint stores to PPG Industries. It also expanded the company s scale in the North American architectural paint market, which is expected to benefit from a recovery in the construction market. The company has realized its targeted annual synergies of $200 million from the buyout. Moreover, in an effort to strengthen its position in the aerospace industry, PPG Industries has acquired specific assets of privately-held specialty coatings company Deft Incorporated. The acquisition of Hi-Temp Coatings Technology, in Mar 2014, also strengthens Equity Research PPG Page 3

4 PPG Industries protective and marine coatings business. More recently, the company bought Panama-based Canal Supplies, which will help it to expand its protective and marine coatings business in Central America. Moreover, the recent buyout of Mexico s leading paint company Consorcio Comex S.A. de C.V. for $2.3 billion represents a significant move by PPG Industries as it will reinforce its architectural coatings business in Mexico and Central America by offering a leading architectural coatings portfolio. The company expects the acquisition to add around $1 billion to its sales in 2015 and be accretive to its earnings. PPG Industries has an aggressive cost cutting and restructuring strategy. Cost savings from these restructuring efforts will act as a positive catalyst for the company. PPG Industries has completed its 2012 restructuring program and has achieved its targeted annual cost savings of $140 million. Separately, the company s Board, in July 2013, approved a new $102 million restructuring program focused on achieving cost synergies associated with the North American architectural coatings business takeover. The restructuring program will also include actions for businesses grappling with challenging market conditions, especially protective and marine coatings and certain European businesses such as architectural coatings and fiber glass. PPG Industries growth strategies coupled with the cost-control measures delivered great value to shareholders in 2014 and is expected to do the same in PPG Industries also has an impressive record of returning cash to shareholders through dividends and share buybacks. The company has a rich history of raising dividends. Most recently, it has raised its quarterly dividend by $0.06 per share to $0.67 per share ($2.68 per share annualized). PPG Industries Board has also authorized the repurchase of shares worth $2 billion. The company repurchased roughly 3.8 million shares worth $750 million in It has returned over $1.1 billion to its shareholders in the form of dividend and share repurchases in RISKS PPG Industries significant presence in the U.S. construction, European architectural, global appliance and industrial coating markets exposes it to substantial headwinds. Commercial construction market in the U.S., although recovering lately, is expected to remain sluggish in the near future. We are concerned about the late-cycle exposure in non-residential construction and marine coatings and the company s overexposure in Europe. This puts PPG Industries' earnings estimates and share price at risk. The company s operating results have been significantly affected by the cost of raw materials and energy. Changes in natural gas prices have a significant impact on the operating performance of its Commodity Chemicals and Glass segments. It also imports raw materials, particularly for use at its manufacturing facilities in the emerging regions of the world. In most cases, those imports are priced in the currency of the supplier, risking margins if the foreign currency strengthens against the local currency of its manufacturing facilities. While prices of key raw materials have stabilized of late, they are still higher on a year-over-year basis. The company is seeing cost pressure for organic/ petrochemical-based raw materials such as ethylene and propylene. PPG Industries is expected to continue to face macroeconomic challenges going ahead. While the company is seeing improvements in Europe of late, it may continue to face softness in the region with weak economic activity in some parts (especially in Western Europe) and a still challenging demand environment. PPG Industries is also exposed to unfavorable currency exchange translation, especially in emerging markets. The company sees currency headwinds in 2015 and expects an unfavorable impact of $650-$750 million on its sales and $65-$75 million on its earnings. Equity Research PPG Page 4

5 RECENT NEWS PPG Industries Q4 Earnings Trump, Charges Dent Net January 15, 2015 PPG Industries topped earnings expectations in the fourth quarter of 2014 on volume gains across major regions and synergies from acquisitions. But its profit slid in the quarter, hit by hefty debt refinancing charges. Profit from continued operation (as reported) was $86 million or $0.62 per share in the reported quarter, a roughly 64% plunge from $237 million or $1.66 per share posted a year ago. Consolidated profit tumbled 67% year over year to $83 million or $0.60 per share. Barring one-time items including charges of $200 million associated with debt refinancing, the Pittsburghbased coatings giant recorded earnings from continuing operations of $2.11 per share in the quarter that topped the Zacks Consensus Estimate of $1.97. For full-year 2014, adjusted earnings from continued operations were $9.75 per share, also surpassing the Zacks Consensus Estimate of $9.60. Revenues went up around 6% year over year to $3,707 million in the reported quarter. It also came ahead of the Zacks Consensus Estimate of $3,571 million. Sustained sales gains across aerospace and automotive refinish contributed to higher revenues. For the full year, revenues increased around 8% to $15,360 million from $14,265 million in 2013, also beating the Zacks Consensus Estimate of $15,254 million. Segment Review Revenues from the Performance Coatings division went up 10% year over year to $2.1 billion in the quarter, aided by gains from acquisitions and improved pricing. The company saw sustained gains across aerospace and automotive refinish businesses on higher demand. Architectural coatings sales rose by low to mid-single-digit clip in North America while sales volumes in EMEA fell 2% as demand remained mixed in that region. The company saw improved sales of protective and marine coatings in the quarter. Industrial Coatings segment sales inched up 1% to $1.34 billion as volume gains were partly masked by unfavorable currency swings. Automotive OEM coatings volumes rose by mid to high single-digit clips in the quarter with growth witnessed across all regions. The industrial coatings and specialty coatings and materials businesses also logged sales gains in all key regions. Packaging coatings sales also increased in the quarter. Revenues from the Glass segment moved up 3% to $272 million on pricing and volume gains. Flat glass volumes rose strongly on increased demand in both residential and non-residential end-markets. This was offset by a decline in fiber glass volumes resulting from lower volumes in the U.S. that neutralized a gain in Europe. Financials PPG Industries exited 2014 with cash and cash equivalents of $686 million, down around 39% year over year. Long-term debt was $3,544 million, up roughly 5% year over year. Equity Research PPG Page 5

6 PPG Industries bought back 1.4 million shares worth $300 million during the quarter. It spent more than $1.1 billion on dividends and share repurchases last year. Outlook Moving ahead, PPG Industries sees growth to remain mixed by region in 2015 with North America and Asia continuing to grow at levels that are in tandem with The company envisions overall growth in Europe to remain subdued and mixed by country. PPG Industries also remains focused on developing new products and effectively deploying cash on further earnings-accretive opportunities. The company has an active acquisition pipeline and expects share buybacks to remain a key part of its cash allocation. PPG Industries spent $2.5 billion on acquisitions last year. It expects to deploy $1.5 billion to $2.5 billion of cash in this year and 2016 combined on acquisitions and share buybacks. PPG Industries Q3 Earnings Top, Profit Shoots Up October 16, 2014 PPG Industries bested earnings expectations in the third quarter of 2014 on gains across major regions, notably Europe where earnings rose 17% despite mixed sales performance in the region. Cost reduction measures and synergies from acquisitions also supported the results. Profit from continued operation (as reported) was $377 million or $2.70 per share in the reported quarter, a roughly 85% surge from $204 million or $1.41 per share posted a year ago. Consolidated profit jumped 64% year over year to $371 million or $2.66 per share. Barring one-time charges and gains, the company recorded earnings from continuing operations of $2.82 a share in the quarter that topped the Zacks Consensus Estimate by $0.06. Revenues went up around 4% year over year to $3,935 million in the reported quarter. It, however, trailed the Zacks Consensus Estimate of $3,983 million. Sustained gains across aerospace and automotive OEM coatings contributed to higher sales. Segment Review Revenues from the Performance Coatings division moved up 3% year over year to $2.26 billion in the quarter, aided by higher volumes, acquisitions, favorable currency impact and improved pricing. The company saw mid single-digit gains across aerospace and automotive refinish businesses. Architectural coatings sales rose by low single-digit clip in North America while sales volumes in EMEA were flat as demand remained mixed in that region. The company saw improved sales of protective and marine coatings in the quarter. Industrial Coatings segment sales rose 7% to $1.4 billion on the back of volume gains. Automotive OEM coatings volumes rose by high single-digit clips in the quarter with growth witnessed across key regions. The industrial coatings and specialty coatings and materials businesses also recorded sales gains in all regions while packaging coatings sales were slightly weaker. Revenues from the Glass segment rose 2% to $283 million on higher pricing. Flat glass volumes rose strongly on increased demand in both residential and non-residential end-markets, offset by a decline in fiber glass volumes resulting from reduced product availability. Equity Research PPG Page 6

7 Financials PPG Industries exited the quarter with cash and cash equivalents of $2,468 million, up around 58% year over year. Long-term debt was $2,954 million, down roughly 12% year over year. PPG Industries bought back 740,000 shares worth $150 million during the quarter. It has spent $719 million on dividends and share repurchases so far this year. Outlook Moving ahead, PPG Industries remains optimistic in delivering strong earnings on healthy momentum across several of its major end-use markets. The company is also seeing a recovery across North American non-residential construction and marine markets. VALUATION PPG Industries current trailing 12-month earnings multiple is 23.6x, compared with the 21.1x average for the peer group and 18.3x average for the S&P 500. Over the last five years, the company s shares have traded in the range of 10.5x to 23.9x trailing 12-month earnings. PPG Industries strategy of diversifying its business across various products and geographies has come in handy during challenging times. Our Outperform recommendation indicates that it will perform above the broader market. Our price target of $276 is based on 24.4x our earnings estimate for Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low PPG Industries Inc. (PPG) Industry Average S&P Sinopec Shanghai Petrochemical Co. Ltd. (SHI) Asahi Kaisai CP (AHKSY) Royal D S M NV (RDSMY) Praxair Inc. (PX) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA PPG Industries Inc. (PPG) Industry Average S&P Equity Research PPG Page 7

8 Earnings Surprise and Estimate Revision History Equity Research PPG Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of PPG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1111 companies covered: Outperform %, Neutral %, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research PPG Page 9