Thursday, December 18, 2008
(Cont'd from above)...

Jim (cont'd):   

PPG Industries Inc. (PPG), Dow Chemical Co. (DOW), and a third company to be named after the break because I'm a tease... against each other!...

We're playing buy, sell, or hold, which happens to be the name of the first show I was ever on CNBC... which was like in 1997... they had me play buy sell or hold... to find out which you should pull the trigger on... and which ones should be... sell sell sell...

Among the old-line industrials, this is the group that I think should be your focus right now... I think you should have a laserlike focus...

So I want to teach you how to evaluate chemical companies as an exercise on how to evaluate all of the industrials you hear bandied about all day, but still have no idea why one goes up and the other goes down...

And I will show you how to make judgments on individual members of the group because of the tremendous opportunities that they have...

The most important determinant of how a chemical company does, besides demand, are its margins...

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What's a margin?...

It's how much you make after a sale from each barrel or dollop of chemicals... polyethylene or polystyrene... all the polys, all of the ethyls... and the chief influence over that is the price of petroleum... now at $36 (a barrel), down $110 bucks just a few months ago... and, of course, oil's derivatives... mostly natural gas, which is heavily used to make chemicals... and has traded all the way down to five dollars and change...

In addition, these companies make commodities that compete with the rest of the world's commodities... head-to-head... and I've got to tell you, they can now be the lowest cost producer, given the weak dollar, particularly versus the much stronger euro, as US chemicals go head-to-head with the German Colossuses... the home of BASF...

And, to top it all off, the three that I'm actually looking at have high dividends... notoriously big dividends... PPG yielding 4.96%... Dow Chemical yielding a whopping 8.37%... and a player to be named later, which yields 6.37%.

Alright, so how do we rank them?... Let's drill down...

Dividend size matters but, unlike in other things, dividend safety is more important... the strength of their and markets is important to... so is their level of diversification... and their ability to control costs...

So, in these metrics, the one I like best is... PPG. That one's a buy, buy, buy!...

Alright, I know that it's got the smallest dividend, and I know we like dividends here... what short on this thing... but I've got to tell you, being the safest dividend of the bunch is what you want right now, especially because expected earnings for next year are more than twice the dividend payout. I can sleep at night now...

Our rule of thumb for absolute dividend safety is the size of earnings versus the dividend, because the earnings are so big here it's unlikely to be cut. This is the only one of the three to have actually raised its dividend this year... in October yet... and you don't generally see these companies do that if they have any doubt that they are going to cut it in your future. Why?... Because nobody likes to look like a moron...

Now, PPG's stock has been kicked around because people think of it as a chemical company with a lot of auto exposure... but that's just not true anymore...

It used to be the big auto play. It was, in that case, a genuine (bear)... But now, because it's not so (exposed to) autos, it's more of this (bull)... Autos make up a mere 4% of sales, even since the company sold its automotive glass and services business.

Now here's the problem...

Industrial coatings and glass do still make up 24% of PPG's income... and we could see a 15% drop in volume there... that's the big issue, alright...

Outside of that, PPG's businesses are going great gangbusters...

PPG is a nice blend of specialty chemicals, in addition to its commodities chemicals business... It's got a great sales and performance in its coatings business... coatings for airplanes, ships... hey, how about this one... coatings for solar cells and windmills... yeah, a pseudo-Obama play... It grew at 28% in the third quarter... commodity chemicals grew by 25%. Boy, this company is really good...

The company also built a niche for itself in optical chemicals, making the lenses for prescription glasses. And now that's roughly 18% of the prescription glasses sold in this country... are made by PPG lenses. And, by the way, they even sell at Cramer-fave, Wal-Mart (WMT*)... Nobody stops buying glasses in a weak economy, because you know what... that doesn't work... you can't bump into walls to save money... Now, they could grow the optical business in Europe, and make a fortune, thanks to the weak dollar...

Basically, PPG's portfolio of chemicals has been doing better than the rest of the industry and, now that chemical companies have the wind at their backs, who knows what they could do?...

PPG... sitting on top of $600 million... a pile of cash... I say PPG is my buy...

If PPG is the buy, which one is the hold?...

Dow Chemical, the world's largest chemical company, is... don't buy, don't buy...

I know, Dow has that ultra juicy 8.37% yield... I know it seems irresistible to you... I can't blame you. Only Cramer-fave Altria, which I own for AAP, has got a bigger dividend... but... that dividend is nowhere near as stable as PPG's dividend...

Dow's annual payout is $1.68. Every time that guy comes on to CNBC, they always ask him, "Is the dividend safe, is the dividend safe?" He always says yes... The company is expected to earn, though, just $1.98 a share... so, we don't get that twice the dividend protection... even though I think these estimates are too low, given how cheap oil has become and the weak dollar... You've got to believe that the dividend, while reliable, just can't be considered as reliable as PPG's... I don't want to reach for yield... that's what it's called, is reaching for yield... I want safety. I don't want you to say, oh, Cramer put me in this thing and then they cut the dividend...

PPG raised the dividend this year. Dow did not...

How about the businesses?...

Dow is diversified... 34% of its operating income from plastics for full year 2008... 22% from performance chemicals... 19% from performance plastics... 17% from its red-hot ag sciences division... and 8% from plain old plastic.

Like PPG, Dow isn't beholden to anyone in the industry. Dow Chemical is a very financially disciplined company, very well-run, even in this environment of low oil prices and a weak dollar, there are some downside risks here...

For one, Dow estimates that its total exposure to the auto industry is 10%. Oh man, any exposure is bad. And 30% from cyclical businesses, although I think that that some of that could be in a trough...

Another worry... we all know how well they'll integrate their acquisition of Rohm & Haas... their top of the market buy... There are concerns about the joint venture and it's formula with Kuwait Company PC...

Alright, we believe that Dow Chemical radically overpaid for Rohm & Haas... a deal that worked pre-credit crisis, but not so much now. We wish that they could get out of it... that's not going to happen... with the company at its word...

Dow's stock would be much higher here, in my opinion, if they were buying that thing, given the fact that Dow chemical is the largest consumer of natural gas in the world, which is why I liked the stock... In July, Dow Chemical estimated... get this... for energy and materials like natural gas and NAPHTHA... comes to $32 billion a year...

But hey... the price of natural gas has plummeted 80% since then. It was a $10.31 in June. Now it's at $5.00. Oil? $36.22 (a barrel)... down 75% from a 52-week high on July 3... no... I've got to tell you something... that means that Dow is going to have an explosion... an explosion of earnings, even if the sales go down.

Here's the bottom line...

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The Bottom Line!:     PPG Industries Inc. (PPG)'s dividend may be smaller than Dow Chemical's dividend, but I think it's also safer, and the company has less exposure to unhealthy end markets. I still like Dow, but it's the "hold"... PPG is the "buy." Stick with Cramer to hear which company I stick as a "sell"...

Read Jim's next Segment here