PPG Industries: Close to reasonable valuation (NYSE:PPG)

PPG Industries (New York Stock Exchange: PPG) is an excellent company with a promising long-term future. However, inflation has reduced the company’s profit margins. Demand is weak in the face of rising prices and a slowing global economy.Company’s Dividend yields are low in the current interest rate environment. But the company has an amazing track record, paying dividends and growing for 50 years. Dividend growth and consistency may be the reason PPG Industries trades at a premium to its sector.

The global economy faces many uncertainties, from inflation to debt ceiling debates to consumer strength. The current spike in market volatility was expected given these economic conditions, so an investor may have the opportunity to start building his position in the company below $110.

Will global demand be sustained? Up?

In the fourth quarter of 2022, the company posted revenue of $4.1 billion, flat compared to the same quarter in 2021. This growth was driven by an 11% price increase at the expense of volume. The company expects total sales to fall by his mid-single-digit percentage in 2023.

On its fourth-quarter 2022 earnings call, the company reported a slowdown in manufacturing activity in most regions of the world. The slowdown caused the company’s sales volume to drop by 5% from his. In Europe, industrial activity weakened progressively as sales volumes declined at his mid-single-digit percentage. The company posted record sales from customers in the automotive industry, continued recovery in the aerospace market, and organic sales increased 20% year-over-year.

margins are under pressure

The company’s gross profit margin averaged 43.3% over the past decade, but inflation will push gross margins down to below 40% from 2021 onwards. (Appendix 1)The company’s quarterly gross margin dipped below 40% in the June 2021 quarter and further deteriorated to 34.9% in 2022. (Appendix 2)Since March 2020, quarterly gross margin averaged 43%. If the global economy and demand do not deteriorate further and inflation recedes, the company could recover some of its profit margins.Yet the company Admitted It means it will take time for margins to return to their historical averages.

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The company’s operating profit margin, which has averaged 11.8% over the past decade, will be well below that average in 2021 and 2022, at 10.8% and 9.7%, respectively. The company’s operating cash flow of $963 million is down significantly from $1.562 billion and $2.13 billion in 2021 and 2020, respectively. The operating cash flow margin declined to 5.4% from an average of 10.9% over the past ten years.

Increased market volatility

The failure of Silicon Valley Bank, part of SVB Financial Group (SIVB), and strong employment data have cast doubt on future rate hikes by the Federal Reserve. Assuming a discount rate of 8%, the discounted cash flow model estimates an equity value of $103 per share. (Appendix 3)the company may be overvalued at its current $126, a significant pullback from the March 3 high of $137.46. The discounted cash flow model assumes a short-term growth rate of 3% from 2023 to 2027 and assumes long-term growth. semester. Given the current weighted average interest rate of 4.4% in 2022, the 8% discount rate is reasonable for the company.

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The company trades at a forward GAAP PE of 21x, in line with a 5-year average of 21x. 14x sector median. But rising interest rates have raised the cost of capital for all companies, and the company’s average five-year PE multiple may no longer be a valid comparison. The company has shown a lack of pricing power and its cash flow is not sustainable.

Dividends and Liabilities

The stock’s dividend yield is 1.97%, which is lower than the 2-year US Treasury yield of 4.593%. Just last week, two-year US Treasury yields topped 5%. US Treasury yields fell amid bank runs on the SVB. Second largest bank failure In US history after the Washington Mutual bankruptcy in 2009, a sharp decline in yields within days marked a dramatic shift in market volatility.

but PPG stock futures dividend yield is higher than the five-year average 1.73%. An investor can earn a ‘risk-free’ return of over 4% on US Treasuries, giving him a viable option to earn cash returns without taking on much risk. A debt ceiling battle in Congress is another significant risk facing investors in the coming months. This battle could lead to higher interest rates or a lower credit rating for the US federal government, leading to higher interest rates. However, when the S&P downgraded U.S. Treasuries for the first time in his 2011, there was a flight to U.S. Treasuries, so U.S. Treasury prices rose. safety by concern About the European debt crisis. essentially,

The company has a payout rate of 40% over the past 12 months. Higher than sector median 26%, with a five-year average of 34%. After accounting for capital expenditures and dividends, the company’s operating cash for fiscal 2022 was negative $125 million. Operating cash flow fell from $1.5 billion in 2021 to $963 million in 2022, a steep 35% decline. The company’s debt is high in the current interest rate environment, with a debt-to-EBITDA ratio of 3.2x. (Appendix 4)The company is expected to make $2.6 billion in debt and interest payments over 2024-2025. It may be best for the company’s long-term health to have a debt-to-his EBITDA ratio of less than 2.5x. The company hopes that its strengths in businesses such as the aerospace industry can enhance earnings and cash flow.

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uncertain economic situation

Some sectors of the economy, such as the housing sector, may already be in deep recession. But other areas such as travel are very strong.For example, the leisure and hospitality sector Add 105,000 jobs in February. Consumers are showing willingness to spend on leisure and travel, but further price increases could dampen that enthusiasm.Recently, aircraft lease rates have been return to pre-pandemic levelsWith consumers usually the last to know of an impending recession, strength in the travel sector is quickly eroding, putting pressure on PPG’s aerospace business and showing strength in the industry.

Inside me Chemours Company (CC) and Celanese Corporation (CE) said the S&P Volatility Index (VIX) was below 20 and the market was too subdued given the various uncertainties facing the US and global economies. Market volatility has increased over the past week, with the VIX approaching 25, but PPG Industries may not yet be a buyer. Market volatility may present an opportunity to buy PPG Industries for $110 or less. The stock has fallen 8% over the past week.

PPG Industries is a great company in the long term, but it trades at a premium to its sector, with margins eroding in the face of cost headwinds and declining demand in some industries. The company has high debt and a low dividend yield. Stock momentum has weakened over the past three months and is up 3.9% over the past 12 months. However, the stock has outperformed the market, which has fallen 9.3% over the same period. If this market volatility continues, investors may get the chance to acquire his PPG for less than $100.