What’s Happening With PPG Stock?

PPG Industries stock (NYSE: PPG), a paint, coatings, and specialty materials company, currently trades around $125 per share, about 25% lower than the peak level of over $170 seen in June 2021. PPG has fared much worse than its peer – The Sherwin-Williams Company stock (NYSE: SHW) – up 40% over this period. PPG stock has been weighed down due to the soft demand in Europe and a slow recovery in China. PPG saw its stock trading at around $110 in June 2022, just before the Fed started increasing rates, and it’s trading 15% above those levels. This compares with 51% gains for the S&P 500 index over this period.

PPG stock has performed worse than the broader market in each of the last three years. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and uncertain geopolitical environment, could PPG face a similar situation as it did in recent years and underperform the S&P over the next 12 months — or will it see a strong jump? Returning to the pre-inflation shock level of $172 implies that PPG stock will have to gain around 35% from here, and we don’t think that will materialize anytime soon. That said, we do think PPG stock has some room for growth. It currently trades at 1.6x trailing revenues, compared to its average P/S ratio of 2.0x over the last five years. Notably, the $150 average of analysts price estimate reflects around 18% upside from here.

Our detailed analysis of PPG Industries’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• August 2023 – August 2024: Fed has kept interest rates unchanged to quell fears of a recession and keep inflation in check
• September 2023: Fed cut rates by 50 bps and pointed to more rate cuts going forward

In contrast, here’s how PPG stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

PPG and S&P 500 Performance During 2007-08 Crisis

PPG stock saw a decline of 57% from $27 in September 2007 (pre-crisis peak) to $11 in March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $22 in early 2010, rising about 2x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

PPG Fundamentals Over Recent Years

PPG Industries revenue rose from $16.8 billion in 2021 to $18.2 billion in 2023, led by better price realization. The company has seen increased sales for aerospace coatings and automotive OEM coatings. The company’s operating margin decreased from 12.9% to 11.3% over the same period. This can primarily be attributed to higher wages and logistics costs. Its earnings per share stood at $5.35 in 2023, compared to the $6.01 figure in 2021. The company has been focusing on strategic actions to boost shareholder value. In that direction, the company has entered into an agreement to divest its silica product business for $310 million to QEMETICA.

Does PPG Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

PPG Industries’ total debt has been around $7 billion in recent years, while its cash is around $1.2 billion. The company also garnered $2.1 billion in cash flows from operations in the last twelve months. With its cash cushion, PPG appears to be in a position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe PPG Industries (PPG) stock has the potential for some gains once fears of a potential recession are allayed. That said, soft demand in Europe and a slow recovery in China remain key risk factors to realizing these gains.

While PPG stock has room for some gains, check out how PPG Industries’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/24/2024
[2] Cumulative total returns since the end of 2016

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