Why PPG Industries Is Trading at a Discount

After looking at analysts’ ratings in the previous part, we’ll look now at PPG Industries’ (PPG) valuations and compare them with its peers. As of August 25, 2017, PPG Industries’ one-year-forward PE (price-to-earnings) multiple stood at 15.80x, while its peer Sherwin-Williams’ (SHW) one-year forward PE multiple was 20.20x.

The forward PE multiple takes future earnings into consideration when calculating valuations. This valuation method used to compare two or more companies operating in the same industry and see which companies are overvalued and which ones are undervalued.

As of August 25, 2017, PPG Industries is trading at a discount compared to its peer Sherwin Williams. After two successive quarters of beating analysts’ earnings estimates, PPG is now expected to have EPS of $6.11 for fiscal 2017, implying a 5.5% rise over fiscal 2016. For fiscal 2018, analysts are forecasting PPG’s EPS to rise to $6.83, which implies a growth rate of 11.7% over fiscal 2017. However, the biggest concern for PPG is lack of growth in its top line. To fuel revenue growth, PPG may take the acquisition path aggressively. In 2Q17, it acquired The Crown Group. For the next couple of years, PPG has also committed $3.5 billion for acquisitions and share repurchases.

On the other hand, Sherwin-Williams, after the acquisition of Valspar, is expected to post EPS of $15 in fiscal 2017, implying a growth rate of 19.7% over fiscal 2016. For fiscal 2018, analysts forecast SHW’s EPS to be $17.80, a rise of 18.7% over fiscal 2017. With an earnings growth rate that’s better than PPG’s, Sherwin-Willimas commands a premium on its stock.

Investors can indirectly hold PPG Industries by investing in the Vanguard Materials ETF (VAW), which has invested 3.1% of its portfolio in PPG. The other holdings of the fund include Dow Chemical (DOW) and Monsanto (MON) with weights of 9.2% and 6.0%, respectively, as of August 25, 2017.

In the next part, we’ll look at PPG’s stock performance in 2017.