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Morningstar | PPG Is Poised to Widen Margins as Price Hikes Offset Input Cost Inflation in the Coming Years

Through divestiture, acquisition, and internal growth, PPG Industries has continually moved its product mix toward coatings, shedding more commoditized businesses such as chlor-alkali. With the purchase of AkzoNobel's North American architectural coating business, PPG became the world's largest producer of coatings, making a diverse range of paints and protective products that are used to cover everything from living room walls to jumbo jets. Coatings' share of PPG's revenue has grown sharply. Following the sale of PPG's fiberglass business, coatings now make up all of the company's sales.Specialty coatings, such as aerospace coatings, make up 60% of the company's coating business and are characterized by close working relationships with customers. Clients work with PPG to develop application-specific coatings, making specialty clients stickier than a buyer of house paint. These relationships allow PPG to compete more on quality and innovation and less on price. This pricing power allows PPG to pass through a larger portion of raw material cost increases.However, not all of PPG's coating sales are specialized. The firm is also a major producer of architectural paint. In this market, we believe the company must compete more on price, as the typical buyer of house paint makes his or her decision based primarily on price. PPG holds a strong brand portfolio, but we still think house paint is a much more commoditized market than that for specialty coatings such as aerospace.Despite the positives of the firm's specialty coating businesses, the majority of the firm's profits still are tied to volatile end markets, such as construction, housing, and automotive.