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Should You Buy the Dip in PPG Industries?

Shares of paints and coatings manufacturer PPG Industries (PPG) have retreated nearly 10% in price over the past month as the company continues to grapple with heightened supply and COVID-related disruptions. But while accelerating investments to expand its production facilities could bode well for the company, given the concerns surrounding raw materials and logistics cost inflation and labor shortages, can its shares recover in the near term? Read more to learn our view.

Global manufacturer of paints and specialty material PPG Industries, Inc. (PPG) in Pittsburgh, Pa., is a Fortune 500 company that operates more than 156 manufacturing facilities worldwide. Due to the challenging business environment that has stemmed from pandemic-related disruption, the industrial coating supplier’s stock has declined 9.6% in price over the past month. Robust demand for its products from end-user markets, including automotive refinish, marine, and PPG-Comex architectural coatings and higher selling prices, have helped the company achieve approximately 4% organic sales growth in the fourth quarter of 2021.

But PPG’s stock is now trading 15.4% lower than its 52-week high of $182.97.

Although the paint maker’s investments to expand its automotive coatings production should help it capitalize on growing demand, higher logistics cost inflation and supply chain disruptions could mar its market-share growth. Furthermore, the company expects its aggregate net sales volumes to decline in mid-single-digit percentage terms year-over-year.

Here is what could influence PPG’s performance in the coming months:

Expanding Production Facilities

This month, PPG announced that it plans to invest more than $10 million to expand automotive original equipment manufacturer (OEM) coatings production in Weingarten, Germany. The company is constructing a 10,000 square foot addition to its existing facility that is expected to be completed in the second quarter of 2022. This expansion should strengthen its manufacturing and production capabilities in Europe and create value for its key OEM customers.

In addition, last month, the company announced plans to invest $2.7 million to expand its powder coatings manufacturing capabilities at its facility in Sumaré, Brazil. This investment should allow PPG to growing demand in South America.

Business Headwinds

In its last reported quarter, PPG faced significantly higher operating costs due to supply disruptions and manufacturing interruptions in its facilities that negatively impacted its sales volume. In addition, the paint and coatings manufacturer has been experiencing difficulty in fulfilling strong order books in its end-user markets due to the lack of availability of raw material and transportation. The company’s order backlog stood at nearly $150 million at the end of the fourth quarter.

Furthermore, PPG saw a contraction in demand for its architectural coatings do-it-yourself products across all major regions, compared to the fourth quarter of 2020. Also, COVID-related labor shortages and inflationary pressure could impact its earnings and revenue in the coming quarters.

Mixed Growth Estimates

Analysts expect PPG’s EPS to increase 12.4% year-over-year in its fiscal year 2022 and 18.9% in fiscal 2023. However, its $1.17 consensus EPS estimate indicates a 37.8% decrease in the current quarter, ending March 2022. The $4.26 billion consensus revenue estimate of $4.26 billion for the current quarter indicates a 9.6% improvement year-over-year. Also, its revenue is estimated to increase 9.8% year-over-year to $18.45 billion in 2022.

Mixed Financials

PPG’s net sales increased 11.5% year-over-year to $4.19 billion in the fourth quarter, ended Dec. 31, 2021. Its sales from performance coatings came in at $2.51 billion, representing 15.7% growth from the prior-year period. In addition, its acquisition-related sales grew 11% year-over-year. But the company’s income under the performance coating segment stood at $243 million, down 19% from the prior-year quarter. And its segment income from industrial coatings declined 63% year-over-year to $105 million. PPG’s EPS from continuing operations fell 2% from the prior-year period to $1.12

POWR Ratings Reflect Uncertainty

PPG has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PPG has a C grade for Sentiment. Analysts’ expectation that the stock’s EPS could decline in the current quarter justifies the grade.

Moreover, the company has a C Momentum grade, which is consistent with its price returns over the past month.

In addition to the grades I have highlighted, one can check out additional PPG ratings for Stability, Value, Quality, and Growth here. PPG is ranked #57 of 90 stocks in the A-rated Chemicals industry.

Bottom Line

Increasing efforts to strengthen production capabilities in Europe and South America could boost the leading paint and coatings manufacturer PPG’s sales and allow it to meet the growing demand for its products in these areas. However, a contraction in demand for its do-it-yourself products and elevated operational costs and staffing shortages have added uncertainties to its prospects. Therefore, we think investors should wait until the company fares better in overcoming these challenges before investing in the stock.

How Does PPG Industries (PPG) Stack Up Against its Peers?

While PPG has an overall C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Covestro AG (COVTY), Arkema S.A. (ARKAY), and AGC Inc. (ASGLY), having an A (Strong Buy) rating.

PPG shares were unchanged in premarket trading Monday. Year-to-date, PPG has declined -10.21%, versus a -6.95% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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