Like many analysts, I am bullish on PPG Industries, Inc. (PPG).
PPG (formerly Pittsburgh Paint & Glass) is the second-largest producer in the U.S. of chemicals, architectural paints, industrial coatings, marine coatings, packaging coatings, and specialty materials.
The company has operations and sales in six regions across the globe. (See PPG stock charts on TipRanks)
Share prices are up 27.8% over the past year, and annual sales were $13.8 billion in 2020. Q2 net income came in at $431 million, which was reported on July 19.
The company also holds a “Perfect 10” TipRanks Smart Score, citing positive technicals, and bullish news sentiment.
Potential Downsides to PPG Stock
Following the global paints and coatings industry is as exciting as watching paint dry. Organic growth increases in revenue and gallonage are slow and steady.
The market competition is from local manufacturers and about 10 global companies. Mainland China and other Asian countries are the largest markets of production, and consumption.
Downsides to consider if investing in PPG include raw material shortages, and inflation sparking end-user price increases. Recent downward pressures on the stock price are because of these factors, and their impact on future revenue and margins.
PPG’s debt level is not a concern, but worth noting. The company lists short-term liabilities at $5.5 billion on its current balance sheet. Cash and receivables total $4.7 billion. The company’s strong cash flow puts it in a position to cover debt and interest payments.
Other risks include compliance costs to meet environmental standards in a highly regulated industry. Shortages of raw materials, and price hikes plague the chemicals and coatings industry. There is also a global shortage of containers for materials from China and Africa.
Finally, COVID-19 hit Chinese workforces and PPG factory workers particularly hard, limiting production output. PPG released a statement saying, “The effects of the recent COVID-19 pandemic have negatively impacted and are continuing to adversely impact our financial condition and results of operations.”
On the Bright Side
PPG ended the first quarter with 25 of the top 30 hedge funds having shares in their portfolios. There has not been a lot of insider trading all year, with just two sells in the past five months.
PPG’s market power puts the company in a better position to corral production materials and raises prices for end-products.
The company is also not relying on organic growth. The share price is not propped up by company buybacks. PPG is pursuing M&A worldwide. Yet, its debt-to-equity ratio at last report is a low 2.49.
Wall Street’s Take
PPG earns a Strong Buy consensus rating from Wall Street analysts, based on 11 Buys, and one Hold. The average PPG price target of $186.55 implies 19.2% upside potential to current levels of trading.
Bottom Line
PPG management focuses on building revenue, margins, and profits, while spending cash prudently. It speaks regularly about protecting shareholder equity.
Chemicals and paints may offer little glitz and romance, but they provide plenty of opportunities for making money.
Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article
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