PPG Industries Inc. (PPG, Financial), the largest producer of coatings in the world, announced earnings results last week that came in ahead of what Wall Street analysts had anticipated.
Results were powered primarily by price increases that have been implemented throughout the company over the last two years. Volume did see a slight decline, but, overall, PPG Industries’ business performed quite well as it is even seeing a rebound in its weakest businesses.
Despite this, shares of PPG Industries are trading at a discount to its intrinsic value. And with more than five consecutive decades of dividend raises, the company is also a Dividend King.
Let’s examine the company and its most recent quarterly report to see why PPG Industries could be a good purchase at the current price.
Quarterly highlights
PPG Industries reported earnings results for the second quarter on July 21. Revenue grew 7.6% to $4.69 billion, coming in $28 million ahead of estimates. Organic revenue was up 8% for the period. Adjusted net income of $430 million, or $1.18 per share, was below adjusted net income of $465 million, or $1.94 per share, in the prior year. Still, adjusted earnings per share outperformed the market’s expectations by 8 cents.
The Performance Coatings segment, which accounted for 62% of sales, grew 7% to $2.9 billion. Selling prices were the main driving force, adding 11% to results for the period. Acquisitions added 4%. These gains were offset by 4% headwinds from both volume and foreign currency exchange rates.
Industrial Coatings grew 9% to $1.76 billion. Higher realized selling prices added 14% and a 3% benefit from acquisitions more than offset a 5% impairment from currency exchange and a 3% decrease in volume.
The same day of the earnings release also saw PPG Industries raise its dividend 5.1% to a quarterly rate of 62 cents. This marks the company’s 51st consecutive year of dividend growth.
Takeaways
Revenue for the quarter was a new record, the seventh consecutive quarter where PPG Industries has established a new high for top-line performance.
To put into perspective how strong revenue growth has been for PPG Industries, we have to look back at the prior-year period. That 2021 second quarter faced an extremely easy comparable period as PPG Industries saw a significant decline during the worst of the Covid-19 pandemic. The company experienced a 44.6% increase in revenue in the same period a year ago as demand for products rebounded in a major way.
Producing nearly 8% growth on top of last year’s improvement speaks to how in demand PPG Industries’ products were in the most recent period.
Each segment performed well. Performance Coatings was led by automotive and aerospace, two areas that were extremely weak over the past few years due to the pandemic. That appears to be changing. Automotive had a low-teens gain in automotive refinish coatings. Prices were higher for the business, but volume was ahead of industry growth.
These gains are with vehicle builds still below normal. Prior to the pandemic, average builds were in the low 90 million range. Production is expected to be higher for 2022 than it has been for the prior two years, but still well below 2019 levels. In fact, production is projected to be down close to 10% compared to 2019 and lower by 16% from peak in 2017. PPG Industries is likely to see even stronger demand as auto production gradually increases going forward.
Aerospace is a similar story. Volume improved 10% as aftermarket demand continues to see a recovery. Original equipment manufacturer deliveries are not yet back to pre-pandemic levels, but are expected to be by 2023 or 2024. Aircraft manufacturing is projected to grow by double-digits in the near term as supply chains constraints lessen.
Not all was perfect with the quarter. Raw material costs continue to be an issue for PPG Industries as input costs were up 20% from the previous year. The company continues to see higher energy and transportation costs and port congestion remains a challenge as well. China’s Covid-19 lockdown procedures lasted longer than management had anticipated, but have lessened thus far this month. These factors resulted in higher costs for the company, driving down PPG Industries’ bottom line.
On the plus side, the ability to acquire raw materials improved in the second quarter and should show signs of additional improvements in the third quarter, according to management. Truck availability and logistics should be less of a problem going forward as well.
PPG Industries has proven to be very successful at overcoming higher raw material costs with price increases.
Source: PPG Industries’ Second-Quarter Earnings Results Presentation.
Selling prices have been higher by close to 15% over the last two years as the company has moved quickly to counteract inflationary pressures. This has led to some decline in demand as seen in the most recent quarter.
The good news for the company is that selling prices added double digits to revenue for both segments with only inducing a low single-digit decrease in volume. Customers appear to be willing to pay up for PPG Industries’ offerings, a sign of the company’s brand strength and widespread appeal.
PPG Industries has a GF Score of 87 out of 100, a fairly strong showing for a company that does have some near-term issues.
Valuation analysis
Following the earnings release, estimates for PPG Industries have come down. According to Yahoo Finance, analysts expect the company will earn $7.03 per share in 2022. This is down from $7.24 and $8.12 in the two previous quarters. Those following the company clearly believe that inflationary pressures and supply chains constraints will bring down earnings per share this year.
Looking at 2023 estimates, it seems much of the analyst community believes these issues will not be as extreme as the company is expected to earn $8.53 per share next year.
With a current share price of $128, PPG Industries has a forward price-earnings ratio of 18.2 for this year. On next year’s numbers, the stock trades at 15 times earnings estimates. For context, PPG Industries has a 10-year average price-earnings ratio of 22.5 over the last decade, according to Value Line.
By either set of estimates, PPG Industries is trading at a solid discount to its long-term average valuation.
Shares look inexpensive using the GF Value chart.
With a GF Value of $154.96, PPG Industries has a price-to-GF Value ratio of 0.83. The stock would return 21% if it were to reach its GF Value. Shares are rated as modestly undervalued by GuruFocus.
Final thoughts
PPG Industries topped estimates for both revenue and earnings per share for the most recent quarter. The company has aggressively raised prices over the past two years to get ahead of inflation. Demand has dropped slightly, but not yet by a worrisome level. This reflects the company’s appeal to customers.
PPG Industries is also seeing strength in areas that had been very weak previously. This is especially true for automotive and aerospace, two industries that are not yet back to pre-Covid-19 production. Once they are, PPG Industries should be in a good position with both industries.
While inflation and supply chains are still present, these headwinds are already showing some signs of progress, even if it is just minimal. As they become less of a factor, PPG Industries should see improvements in its overall business and could be in a position to maintain its pricing, potentially leading to even further gains.
If investors can stand the short-term noise, then they could be purchasing shares of a company that is trading well below both its historical average valuation and its intrinsic value. This suggests that those buying PPG Industries today could see good returns from current prices.
