Aerospace Expansion And Calculated Divestitures Propel Growth In High-Margin Segments

Key Takeaways

• Portfolio optimization through divestitures is sharpening focus on high-growth, high-margin segments, potentially boosting revenue and net margins.
  
• Expanding high-demand Aerospace Coatings segment and restructuring efforts aim to drive revenue growth and enhance margin profile amidst industry challenges.
  
• Unscheduled downtime in automotive and weak industrial activity challenge revenue, while strategic divestitures in North America raise execution risks for earnings growth.

Catalysts

Manufactures and distributes paints, coatings, and specialty materials in the United States, Canada, the Asia Pacific, Latin America, Europe, the Middle East, and Africa.

• PPG Industries is executing on portfolio optimization through the divestiture of its architectural coatings businesses in the U.S. and Canada, which should sharpen its focus on higher growth and higher-margin segments, potentially boosting future revenue and net margins.
  
• The company is actively expanding its high-demand Aerospace Coatings segment by investing in capacity improvements, despite current supply constraints, which should drive revenue growth and enhance its margin profile.
  
• PPG has announced a comprehensive restructuring program aimed at eliminating stranded costs and rationalizing its footprint, particularly in Europe, expecting to deliver $175 million in savings once fully implemented, thereby improving net margins.
  
• Strong demand for PPG's technology-advantaged products in segments like aerospace and packaging coatings suggests continued sales volume growth, potentially leading to revenue and earnings improvements.
  
• Despite current industry challenges, including in automotive OEM and industrial segments, PPG expects market dynamics and self-help cost initiatives to support a return to growth, helping to stabilize and increase earnings.

PPG Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PPG Industries's revenue will decrease by -1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $9.32) by about October 2027, up from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2027 earnings, down from 19.7x today. This future PE is lower than the current PE for the US Chemicals industry at 25.8x.
• Analysts expect the number of shares outstanding to decline by 2.39% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

PPG Industries Future Earnings Per Share Growth

Risks

• The automotive OEM industry, particularly in the U.S. and Europe, has experienced unscheduled downtime, negatively impacting PPG’s Industrial Coatings segment and constraining demand, posing risks to future automotive-related revenues.
  
• Even though PPG is experiencing year-over-year improvements, organic sales for Architectural Coatings in Europe remain flat, with lower sales volumes across Western Europe, which could potentially affect revenue growth adversely.
  
• General industrial activity in the U.S. and Europe has been lackluster, resulting in a decline in the Industrial Coatings business's organic sales, which may continue to challenge overall revenue growth.
  
• Raw material costs were flat year-over-year in the third quarter and are expected to continue flat in the fourth quarter; any unforeseen increases could affect net margins and earnings.
  
• The strategic divestitures of the Architectural Coatings U.S. and Canada business may lead to challenges such as stranded costs and the need for effective restructuring, potentially impacting net margins and adding execution risk to earnings growth.

Valuation

• The analysts have a consensus price target of $148.59 for PPG Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $166.0, and the most bearish reporting a price target of just $120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.5 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $126.6, the analyst's price target of $148.59 is 14.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.