Why PPG Industries Is Trading at a Discount to Peers



PPG Industries’ forward PE

In the previous part, we saw the latest analysts’ recommendations, and here we’ll look into PPG Industries’ (PPG) latest valuations in comparison with peer Sherwin-Williams (SHW). As of June 27, 2017, PPG’s one-year forward PE (price-to-earnings) multiple stood at 16.90x, while SHW’s one-year forward price-to-earnings multiple was at 22.60x.

Forward PE is one of the relative valuations that consider future earnings. Investors can make use of this valuation matrix to compare two or more companies operating in the same industry and check which stock is overvalued and undervalued. The forward PE tells us how much investors are paying for a stock per dollar of expected earnings in the next 12 months.

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PPG trading at a discount

At present, PPG is trading at a discount to SHW primarily due to the acquisition of Valspar (VAL). The acquisition is expected to generate $320 million in cost savings in the span of three years. With this acquisition, SHW is expected to become the number one coatings company in the world by revenue. Analysts expect SHW to post earnings per share of $14.70, a growth of approximately 22% over 2016. SHW’s fiscal 2018 earnings are expected to grow by 17.5% over the expected fiscal 2017 earnings.

PPG’s growth story is also intact. Citing growing demand, PPG has expanded its capacity in Russia, and that will likely help to strengthen its position in the region. PPG has announced that it will use $2.5 billion to $3.5 billion in cash for acquisitions and share repurchases to ensure growth and add value to investors. Analysts expect PPG’s earnings per share to grow 7.8% in fiscal 2017 and 10.7% in fiscal 2018, which is lower than SHW. As a result, SHW is trading at a premium to PPG.

You can invest in the iShares US Basic Materials (IYM) to invest indirectly in PPG Industries. The fund has invested 4.8% of its total holdings in PPG Industries. The top holdings of the fund include Dow Chemical (DOW) and DuPont (DD), which have weights of 12.0% and 11.9%, respectively, as of June 28, 2017.


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