PPG Industries Diversified Model Pays Off For Investors

Key Points

• PPG Industries beat and raised guidance, causing shares to fall. 
• The move could lead to a deeper correction, but a buy-the-dip scenario may be in play. 
• The company is a Dividend King and just raised its distribution by 4.8%; it has the power to continue raising for many years. 

PPG Industries NYSE: PPG faces many of the same headwinds as every other business in the S&P 500, but it is still producing growth. Its diversified global business is the root cause of its strength: that and its focus on operational quality. The takeaway for investors is that Q2 results and guidance were not enough to spark a rally and have opened up a potential entry point, although both were better than expected.

This opens an entry point for new money and sets the stage for a rally later in the year. 

“Given the strength and momentum we have experienced year to date in several of our businesses, such as aerospace coatings and automotive OEM coatings, we expect our diverse portfolio mix to provide us with continued resiliency,” said CEO Tim Knavish. 

PPG Has Solid Quarter, Shares Fall 

PPG had a solid quarter and gave no significant reason for investors to sell. The company produced a record $4.87 billion in revenue to beat the consensus by 60 basis points, and it outperformed on the bottom line. The strength was driven by a 4% increase in organic sales underpinned by pricing increases.

The company reports a 4% gain in its 2 operating segments, with volume down 3% in Performance Coatings and 1% in Industrial. The volume gains were offset by a 6% and 5% increase in average pricing aided by FX and acquisitions. FX impacts were near neutral due to a 1% gain in Performance Coatings and a 1% decline in Industrial. 

Margin gains were impressive. The company widened segment margins by 330 basis points resulting in positive cash flow and an 11% increase in net income. Cash flow was impacted by inventory and working capital adjustments related to last year’s supply chain issues and this year’s normalization.

Cash flow rose to $620 million or up $750 million compared to last year. Inventory is down sequentially but still high relative to targets, so this tailwind will at least persist in the current quarter. Regarding EPS, the adjusted earnings came in at $2.25 per share, up 24% compared to last year, a company record, and 515 bps better than expected. 

The guidance is equally good, with Q3 revenue growth expected in the low-single-digits consistent with Q2. The good news is that the earnings targets for Q3 and the full year were raised above the previous ranges.

The full-year outlook is for $7.28 in EPS at the low end of the range compared to the prior high-end of $7.25 and the Marketbeat.com consensus of $7.31. Assuming the company’s momentum continues, this guidance is cautious; it is the 2nd time it was raised this year. 

PPG Capital Returns Get A Fresh Coat Of Paint

PPG is a solid dividend payer of the Dividend King pedigree. The company’s stock yields about 1.65% at the pre-release price, up 4.8% compared to last year. This is the 51st consecutive increase and not the last. The company’s balance sheet and cash flow are healthy and getting healthier by the quarter.

The company is net debt, but leverage is low, and net debt is down about 8% compared to last year. Based on the Q2 results and outlook, cash flow should allow additional debt reduction in the 2nd half of the year. 

The analysts like this stock, although the data has mixed signals. The consensus of 17 analysts is Hold, but that has shifted from Moderate Buy to Hold and back again more than once over the last 12 months.

The price target is more telling; it assumes about 2.5% of the upside and is firming relative to last month and last quarter. The price target is down on a YOY basis but up about 8.5% since the last report. The post-report action has been light but mildly bullish, with 1 analyst raising their target to $140 compared to the $153.50 consensus figure. 

The Technical Outlook: PPG Industries Pulls Back From Resistance

PPG stock price pulled back from critical resistance following the Q2 release and guidance increase. The pullback could signal a deeper correction in the market, but investors are cautioned to wait. The pullback may result in a buy-the-dip scenario that could confirm support at the 150-day moving average. In that scenario, the stock may consolidate at or near the $140 level before continuing its uptrend.