Forward PE multiple
In this final part of our series, we’ll take a look at the relative valuations for PPG Industries (PPG) and its closest peers. They include Sherwin-Williams (SHW) and Valspar (VAL), which are competitors in the paints and coatings industry.
Forward PE (price-to-earnings) is a good relative valuation method that considers the company’s future earnings for calculation. It tells how much investors are paying per dollar of expected earnings in the next 12 months.
As of August 26, 2016, PPG Industries was trading at a one-year forward PE multiple of 16.0x compared to Sherwin-Williams and Valspar at 21.20x and 20.30x, respectively.
The EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple is an important relative valuation. It’s used widely in capital-intensive industries such as the chemical industry. As of August 26, 2016, PPG Industries’ one-year forward EV-to-EBITDA multiple stood at 10.80x. The multiples for SHW and VAL were both 12.90x.
Why is PPG trading at a discount to its peers?
PPG Industries is trading at a discount compared to its peers. Following are some of the reasons for that:
- The valuations for Sherwin-Williams and Valspar are high since Sherwin-Williams is acquiring Valspar. The deal is expected to be completed by the end of 2016.
- Once the merger is completed, the combined entity will have revenue of $15.8 billion and will overtake PPG as the number-one player in paints and coatings. The expected synergy from this merger is expected to be $280 million in two years, and thus there will be a possibility of an improved operating profit margin.
- PPG Industries’ expenses related to acquisitions, divestitures, and asbestos settlement have had a negative impact on its overall operating profit margin.
- Lately, PPG’s margin growth has been driven mainly by cost-controlling measures. Its revenues have grown marginally since 2010.
- PPG’s EPS (earnings per share) growth is low compared to SHW. This is mainly due to SHW’s aggressive share repurchase program compared to PPG’s.