Performance Coatings Shine Bright Amidst Calculated Divestitures And Aerospace Momentum

Key Takeaways

• Strategic divestitures and restructuring are expected to optimize the portfolio, enhancing margins and earnings through improved segment performance and organic growth.
  
• Investments in growth areas like Aerospace Coatings, along with disciplined cost management, are set to drive revenue and bolster profitability.
  
• Operational and industry challenges, including downtime, lackluster economic conditions, and strategic sales, pose risks to PPG's revenue growth and margin stability.

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's divestitures of the silicas products business and the U.S. and Canada Architectural Coatings business, along with restructuring plans, will optimize their portfolio, potentially improving segment margins by about 300 basis points and enhancing organic growth, thereby positively impacting net margins and earnings.
  
• The Performance Coatings segment has demonstrated consistent organic growth, particularly in automotive refinish and Aerospace Coatings, which is expected to continue, driving overall revenue growth and enhancing net margins due to higher-margin products.
  
• The company's ongoing investment in debottlenecking and increasing production capacity in Aerospace Coatings, which has shown significant demand, suggests potential revenue growth and improved earnings through scaling efficiencies.
  
• PPG's strategic focus on high-growth, high-margin businesses, coupled with disciplined cost management and a restructuring program promising $175 million in savings, is anticipated to enhance overall profitability and potentially boost earnings growth.
  
• Strong financial flexibility, as evidenced by a robust balance sheet and consistent cash flow generation, supports shareholder value initiatives such as share buybacks, which could positively influence earnings per share growth.

PPG Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PPG Industries's revenue will decrease by -0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $9.33) by about November 2027, up from $1.5 billion today.
• 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, up from 19.2x today. This future PE is lower than the current PE for the US Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, 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, is experiencing unscheduled prolonged downtime, negatively impacting PPG's top line and potentially constraining revenue growth.
  
• General industrial activity in the U.S. and Europe remains lackluster, contributing to a mid-single-digit percentage decline in organic sales for the Industrial Coatings business, impacting revenue and earnings.
  
• Despite raw material costs being flat year-over-year, there is uncertainty regarding future cost trends, and unexpected cost increases could pressure net margins.
  
• The strategic sale of the U.S. and Canada Architectural Coatings business, despite possible short-term financial benefits, could introduce stranded costs and operational disruptions, impacting net margins and earnings.
  
• A decline in the overall collision claims and specific volume dynamics in businesses like Refinish could hinder revenue growth, particularly if macroeconomic conditions or industry trends worsen.

Valuation

• The analysts have a consensus price target of $147.46 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 $17.7 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $123.42, the analyst's price target of $147.46 is 16.3% 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.