PPG - PPG Industries: A Growth Gem In A Troubled Sector

2024-01-01 19:39:29 ET

Summary

• The IT sector outperformed the S&P 500 in 2023, with a total return of over 56%, while more than 70% of SPX member underperformed the broad market.
• The Materials sector underperformed the S&P 500, with a rise of 12.5%, but I see PPG has possessing above-average growth potential in 2024.
• PPG Industries features strong earnings growth and a reliable dividend yield.
• On this high-momentum stock, I highlight key price levels to watch over the coming months.

The Information Technology sector led the way in 2023. Up more than 56% (total return) on the year, I.T. was one of just three sectors outperforming the S&P 500. Interestingly, 72% of S&P 500 stocks failed to match the sporty 26.2% total return on the SPX, according to a chart from eToro’s Callie Cox . Among the relative-losing sectors was Materials. The group, which often rallies well amid a falling US dollar and stronger US real GDP growth outlooks, rose 12.5%, about in the middle of the pack.

I have a buy rating on one Chemicals industry companies in the space. PPG Industries (PPG) features solid earnings growth and a reliable dividend yield that investors should consider holding in 2024.

Materials Underperforms the S&P 500 in 2023

According to Bank of America Global Research, PPG Industries is a global supplier of industrial and performance coatings with 2022 sales of $17.7 billion. The company has about 150 production facilities worldwide, including subsidiaries, joint ventures, and equity affiliates, and employs more than 40,000 people.

The Pittsburgh-based $35.5 billion market cap Specialty Chemicals industry company within the Materials sector trades at a near-market 19.6 forward non-GAAP price-to-earnings multiple and it pays a 1.7% forward dividend yield , according to Seeking Alpha. Ahead of earnings due out in January, shares trade with a moderate 23% implied volatility percentage while short interest on the stock is modest at just 0.9% as of December 29, 2023.

Back in October, PPG reported a solid EPS beat. Q3 non-GAAP earnings per share of $2.07 topped the Wall Street consensus forecast of $1.94 while it grew its top line 4% from year-ago levels to $4.64 billion. The management team said it expects 2023 adjusted EPS to verify in the $7.58 to $7.64 range, an increase from its previous guidance and the $7.49 consensus.

Amid several growth drivers, PPG is executing well despite a volatile macro environment. Four of its business segments reported record quarterly sales numbers in Q3, though its key industrial segment faced some challenges. You might not think of PPG as a multinational player, but CEO Tim Knavish said on the call that the company’s diverse exposure, including assets in Mexico and Northern Europe, helps to diversify the company – that is seen in a healthy out-year EPS growth forecast. Not surprisingly, analysts at Goldman Sachs recently put PPG on its Conviction Buy list .

Key risks include a stronger US dollar, a decline in domestic and global auto production, as well as a general slowdown in the housing market. Industrial Production is also an important variable and possible risk heading into 2024 along with higher raw material prices should inflation rebound. PPG must also execute well on any acquisitions, should it choose to seek external growth opportunities.

On valuation , analysts at BofA see earnings rising by more than 27% in 2023 with continued robust EPS advancement in the out years. The current consensus earnings forecast calls for operating EPS topping $9 by 2025, though its top-line growth rate is only in the low single digits.

Dividends, meanwhile, are expected to climb at a steady clip over the coming quarters. I am mildly concerned about the valuation which is now near 20 on a NTM non-GAAP EPS basis, but PPG is highly positive when it comes to free cash flow, and its FCF is forecast to rise through 2024 and 2025.

PPG: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume 2024 EPS of $8.42 and apply the stock’s 5-year average earnings multiple of 20.1, then the share price should be near $169, making the stock slightly undervalued today. Also consider that its forward non-GAAP PEG ratio is somewhat cheap compared to its historical average (1.57 vs 3.65). The high and steady earnings growth rate should be quite valuable given the market’s expected 10% earnings climb in 2024. Overall, I concede that there are mixed valuation metrics, so this is not a strict value play.

PPG: Mixed Valuation Metrics, Cheap Considering Its High Growth

Compared to its peers , PPG features a somewhat weak valuation, but that is more than offset by a solid growth trajectory while its profitability trends are downright stellar. Moreover, EPS revisions have been very much to the positive side in the last three months, perhaps helped by a ninth-consecutive bottom-line beat back in October. With positive share-price momentum , there are more tailwinds than headwinds for PPG. Overall, PPG is currently ranked no. 3 out of 44 in its industry, per Seeking Alpha’s Quant Ranking system.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2023 earnings date of Thursday, January 18 AMC with a conference call the following morning. You can listen live here . No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With shares modestly undervalued and with a decent yield, the technical chart is not an all-clear. Notice in the graph below that there’s key resistance that could come about at the $153 mark. PPG paused there in December as shares now work off technical overbought conditions (see the high RSI momentum oscillator at the top of the graph). Assuming we see a low-volume pullback off the low $150s, perhaps finding support near $140, then an eventual breakout above the 2023 peak would portend a potential bullish upside measured move price objective to $185 ($153-$120 = $33, $33+$152=$185) . That target is based on the key $120 support level – the height of the pattern is then added onto the breakout point. $183 is also where PPG peaked in mid-2021, so there is some confluence there, technically.

Also take a look at the volume by price indicator on the left side of the graph – with a significant number of shares traded between $120 and $145, pullbacks should have ample natural buying support. Finally, its long-term 200-day moving average has turned positive, suggesting the bulls are gaining control of the chart.

Overall, I expect a modest pause in the uptrend that took off in late October, but longer term, the chart and momentum features are constructive for a move to the low to mid-$180s.

PPG: Some Near-Term Resistance, Eyeing $185 Longer Term

The Bottom Line

I have a buy rating on PPG. I see the valuation as mildly cheap, while the technical picture is encouraging when scanning the key indicators.

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