Does PPGs Guidance Mean Hard Times For Home Builders?

PPG Industries Is More Than Just House Paint

PPG Industries (PPG) is an iconic maker of paint and home construction adhesives. With brands like Glidden, PPG Paints, and Liquid Nails in the portfolio it is easy to associate the company with home improvement and homebuilding. Some investors may even use it as an indicator of the homebuilding industry but that would be a mistake.

PPG Industries is so much more than house paint. Its results are not a good proxy for the U.S.  home building industry or home improvement stocks. Aside from its expanding global presence, PPG Industries’ exposure to automotive, industrial use, military applications, infrastructure projects, and specialty coatings overshadows its exposure to the U.S. homebuilding market.

Don’t get me wrong, the housing market is important to PPG, without it the company would look much different. What I’m saying is PPG isn’t as important to the homebuilders as the homebuilders are to PPG. PPG is more important to industry on a global scale. Based on uptrends in building permits, housing starts, and home sales outlook for the homebuilders remains robust. The outlook for the global industry is still cloudy.

The homebuilder sector broke out to a new high today and will probably deliver a lot of alpha in 2020. PPG may not deliver alpha but it does have strong cash flow, plenty of free-cash flow and near-Dividend King status. Today’s weakness could signal the next buying opportunity.

Weak Growth And Weak Outlook Drive PPG Shares Lower

PPG Industries reported earnings this morning and gave a downbeat outlook for 2020. The company reported a solid uptick in net sales on a constant-currency basis, the problem is a downtick in sales volumes offset the strength. If not for the successful pass-through of costs the company would have reported a decline in total revenue.

Currency conversion played a roll in weaker-than-expected top-line growth. The dollar has been trading near two-year highs versus the basket of world currencies, that strength shaved a full percent off of revenue for the quarter. The dollar is not expected to give up any ground this year so expect currency conversions to weigh on results through 2020.

The guidance for 2020 is what really caught the market’s attention. While the company is expecting growth its tepid growth and the guidance came with a large dose of uncertainty. Both EPS and revenue were guided to a wide range below consensus sending shares down more than -3.0% in early trading

Michael H. McGarry, PPG CEO and Chairman.

“Our guidance range is broad reflecting the heightened level of uncertainty at this particular time.”

There Is Growth In The Forecast

Despite providing a weaker than expected outlook the outlook is good. PPG is expecting revenue to grow 1-3% and deliver 4.-9% EPS growth, more than enough to sustain the health of its dividend. The signing of the Phase One trade deal could add some upward pressure to these numbers, it will alleviate a lot of uncertainty if nothing else.

Michael H. McGarry, PPG CEO and Chairman.

“Our 2019 cash flow from operations totaled approximately $2.1 billion, which is about $600 million higher than 2018 and an all-time record for any year. We also continued our legacy of returning cash to shareholders, with about $800 million returned in 2019 through share repurchases and dividends, including a per-share dividend increase for the 48th consecutive year,”

When it comes to dividends, PPG Industries is a Dividend King (almost). With 48 years of consecutive distribution increases, there is a high expectation for annual increases to continue. The payout ratio is very low at 32% so there is little fear of a distribution cut. At current levels, the company has plenty of free cash flow to continue increasing the dividend, repurchasing shares, and expanding the business.

The Technical Outlook: Is PPG A Buy?

Shares of PPG gave up more than 3.0% at the open to trade just above the $125 level. This level is a potential area of support and may keep prices from moving lower. The long-term outlook for PPG is growth, the company is expecting an acceleration in the 2nd half, so this is a potential buying opportunity. In the near-term, the indicators are bearish and suggest support will be tested before the 2019 uptrend can resume.

The indicators are mixed but show signs of support at the current level. The divergences in MACD and stochastic are telling so I would not be surprised to see price action rebound quickly. Cautious traders may want to wait out the first bounce because I would still expect price action to retest support before making a full recovery and reversal.