It’s Time To Pull The Trigger On PPG Industries

PPG Industries Beats And Raises On Rising Demand

The paint industry, as a whole, has been doing fairly well this year. There are spots of weakness within the group but it is limited to industrial use and even that weakness is dissipating. Companies with a healthy exposure to consumer trends, housing, and remodeling efforts driven by the pandemic have seen strong demand. Demand enough to not only issue guidance but raise it in a world where few CEOs feel it’s safe to commit. And that story is true with PPG Industries (NYSE:PPG).

PPG Industries is a diversified play on paint and other coatings with a very healthy exposure to consumer trends. Management issued an update to guidance only a few weeks that highlight strength within the market. Although a decline in total revenue was still expected earnings were projected in a new range well above the previous due to improving demand, cost-saving efforts, and higher realized prices.

PPG Industries Reports A Solid Third Quarter, Guides Strong

PPG Industries was expecting total sales volume to fall 8% to 15% in the 3rd quarter but the actual results were much better. On a volume basis, sales fell closer to 5.0% but were offset by a 1.3% increase in pricing that will carry through to the following quarters. In terms of revenue, the total revenue of $3.68 billion is down only -3.9% and better than the consensus by 220 basis points.

On a segment basis, the Aerospace/Industry was the weakest link with a 35% decline in revenue. The Automotive segment was flat over the last year while Architectural Coastings (house paint) surged 5% to 10% by region. The results in Automotive and Architectural are noteworthy because they represent more than 70% of the gross. The company says that next year when demand picks up in the other 30%, earnings results will accelerate again.

The bottom line results are even more encouraging. Adjusted EPS came in at $1.93 and the top of the company’s recently issued range. The improvement in EPS is due to the combined effects of volume-rebound, cost-saving efforts, and higher prices. The combination resulted in a 300 basis point improvement to the margin that should persist into the coming quarter at least.

Looking forward, the company is expecting revenue and earnings in a range above the current consensus. Management is calling for EPS in the range of $1.50 to $1.57 versus the $1.44 expected by the analysts. Added to the YTD total the company’s earnings are on track to exceed the consensus for FY 2020 results by at least 400 basis points.

There’s already been one analyst to speak out because of PPGs 3Q results and I expect more will soon follow. Morgan Stanley upped its rating on PPG from Average to Equal Weight with a new price target of $140. The $140 is not the Wall Street high but it’s close and worth about 4% upside.

PPG Is A Solid Dividend Payer

PPG Industries is a solid dividend-payer with a royal pedigree if not a high yield. At current prices, the stock is yielding about 1.61% which is only average compared to the broad market. What is not average is the 48-year history of increases that I do not expect to end. In only 18 months the company will achieve Dividend King status.

The payout ratio compared to this year’s consensus is only 40% and that is a high figure. In terms of what the company is likely to earn by year-end the ratio is closer to 30% and that will get lower next year. Looking to the balance sheet, there is some debt but not enough to make me worry. The company has plenty of cash, plenty of available credit if it needs (it doesn’t need), high coverage, and high free-cash-flow. Regarding cash from operations, it rose from the previous quarter to top $800 million and set a new company record.

The Technical Outlook: PPG Industries Is Setting New All-Time Highs

All other indications aside, PPD has been setting new all-time highs in the last two weeks of trading and that is bullish. The only red flag I see is that stochastic may be overbought but the longer-term charts don’t agree. This stock has room to rise long-term whatever happened in the near-term.

The hurdle for near-term traders is the current all-time high, a mere dollar above the current price action, but it looks like that level could get broken soon. If so, this stock will probably drift higher into the end of the year at least. In that scenario, my first target is near $158. The risk is that prices may pull back to the short-term EMA before making a break for new territory. In that case, I would be a buyer when prices bounce from the EMA and then again when they move to new all-time highs.