Cost Reductions And Demand In Aerospace Coatings Will Strengthen Future Prospects

Key Takeaways

• Strategic divestitures and cost reduction actions are set to improve net margins and support sustainable organic growth for PPG Industries.
  
• Demand in Aerospace Coatings and share gains in multiple segments are poised to drive revenue and organic sales growth.
  
• Weak market conditions in Europe, currency translation issues, and soft global demand risk impacting PPG Industries' revenue growth and profit margins.

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' strategic divestitures, such as the Architectural Coatings U.S. and Canada businesses, are expected to improve operating margins and position the company for sustainable organic growth. This is likely to positively impact net margins and earnings.
  
• The robust demand and backlog in Aerospace Coatings, along with continued share gains in the Auto Refinish and Protective & Marine Coatings segments, are expected to drive organic sales growth and revenue.
  
• PPG plans to capitalize on industrial production stabilization and share gains in Industrial Coatings in Latin America and China, supporting future revenue growth and expanded margins.
  
• PPG's cost reduction actions, including global structural costs and European manufacturing consolidations, aim to deliver $175 million in savings, enhancing net margins and overall financial performance.
  
• With cash deployment strategies focused on share repurchases and potential M&A, along with a strong balance sheet, PPG is positioned to enhance earnings per share (EPS) by leveraging financial flexibility.

PPG Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PPG Industries's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $8.66) by about April 2028, up from $1.3 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 16.8x on those 2028 earnings, down from 17.2x today. This future PE is lower than the current PE for the US Chemicals industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 3.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

PPG Industries Future Earnings Per Share Growth

Risks

• Weak consumer confidence and lower sales volumes in the European architectural coatings market could affect revenue and net margins.
  
• Unfavorable foreign currency translations, especially from the Mexican peso, impacted net sales, affecting earnings and profit margins.
  
• The Industrial Coatings segment faced reduced demand due to soft global industrial production and weak automotive OEM industry production, which could impact revenue and overall earnings.
  
• Delays in order fulfillment, as indicated by increased order backlog in Aerospace Coatings despite improved production capacity, might affect short-term revenue recognition and cash flow.
  
• With anticipated slow demand in Europe and global industrial end-use markets, there is a risk to revenue growth expectations and margin stability if the economy does not improve as projected in 2025.

Valuation

• The analysts have a consensus price target of $125.696 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 $108.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.8 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $101.78, the analyst price target of $125.7 is 19.0% 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.