Downward Momentum for PPG Industries (PPG) Continues

PPG Industries (PPG) stock has fallen by -3.3 % this aftermarket. At $123.6 per share, the company is overvalued -- but it's essential that potential investors consider the company's mixed growth prospects and mixed market sentiment before committing.

PPG Industries, Inc. manufactures and distributes paints, coatings, and specialty materials worldwide. The large-cap Basic Materials company has 49,300 full time employees and is based in Pittsburgh, United States.

PPG Has a Higher P/E Ratio Than the Sector Average

Compared to the Basic Materials sector's average of 8.57, PPG Industries has a trailing twelve month price to earnings (P/E) ratio of 27.6 and an expected P/E ratio of 17.9. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $4.48 or forward earnings per share of $6.92.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since PPG Industries's P/E ratio is higher than its sector average of 8.57, we can deduce that the market is overvaluing the company's earnings.

PPG Industries Is Overvalued in Terms of Expected Growth

PPG Industries's PEG ratio is 3.79. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in PPG Industries's case, it tells us the company is overvalued.

PPG Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since PPG Industries's P/B ratio of 4.8 is higher than its sector average of 1.86, such a margin of safety does not exist for the stock.

PPG Is Generating Cash

PPG Industries has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of -12.1%, compared to -2.2% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -12.6% and a coefficient of variability of 21.2%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 1,562 -371 1,191 -34.78
2020-12-31 2,130 -304 1,826 9.54
2019-12-31 2,080 -413 1,667 n/a

PPG Industries's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing PPG Industries's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

PPG Industries's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 16,802 10,286 38.78 -11.42
2020-12-31 13,834 7,777 43.78 2.12
2019-12-31 15,146 8,653 42.87 n/a

PPG Industries's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 16,802 4,822 10.08 -21.98
2020-12-31 13,834 4,270 12.92 0.16
2019-12-31 15,146 4,539 12.9 n/a

PPG Industries's cost of revenue is growing at a rate of 11.1% in contrast to 3.5% for operating expenses. Sales revenues, on the other hand, have experienced a 6.4% growth rate. As a result, the average gross margins growth is -4.6 and the average operating margins growth rate is -10.9, with coefficients of variability of 6.4% and 13.7% respectively.

PPG Industries Benefits From Positive Market Signals

The market sentiment regarding PPG Industries is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $170 to $104. PPG is trading -8.21% away from its target price of $134.65. 1.0% of the company's shares are tied to short positions, and 82.4% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 20,472,227 2022-09-29 9% $2,530,367,225
Blackrock Inc. 20,401,585 2022-09-29 9% $2,521,635,874
JP Morgan Chase & Company 16,912,062 2022-09-29 7% $2,090,330,837
Wellington Management Group, LLP 15,751,328 2022-09-29 7% $1,946,864,116
Massachusetts Financial Services Co. 14,858,593 2022-09-29 6% $1,836,522,072
State Street Corporation 11,265,977 2022-09-29 5% $1,392,474,740
ClearBridge Investments, LLC 5,364,936 2022-09-29 2% $663,106,081
Geode Capital Management, LLC 4,630,730 2022-09-29 2% $572,358,220
Wells Fargo & Company 3,592,657 2022-09-29 2% $444,052,399
Bank of America Corporation 3,441,004 2022-09-29 1% $425,308,089
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.