Evercore ISI downgrades PPG stock on margin headwinds, portfolio review

On Monday, Evercore ISI adjusted its stance on PPG Industries (NYSE:PPG) stock, moving from an "Outperform" rating to an "In Line" rating, alongside setting a price target to $152 from the previous target. The revision follows an analysis of the company's first-quarter performance, which highlighted certain challenges within its portfolio.

The firm noted that PPG's pricing power had been expected to complement raw materials deflation and improve margins. However, despite occasional margin improvements, these were often overshadowed by unexpected shifts in portfolio and regional dynamics.

The analyst also pointed out that while it's premature to evaluate PPG's organic growth initiatives fully, management decisions, such as the North American architectural review, indicate a strategy that may shrink to grow or at least prioritize margin improvement.

The first quarter of 2024 provided a clearer view of the headwinds PPG faces, with industrial segments experiencing pricing reductions and performance end markets falling short of expectations.

The review of the North American architectural segment, which could result in various structural changes, is anticipated to be clearer by early third quarter of 2024. This review process is expected to take time for the market to assess the restructured PPG.

Evercore ISI acknowledges the presence of high-quality segments within PPG, such as Aerospace, Automotive OEM, and certain architectural markets in Mexico and Europe. However, the firm suggests that the clarity and coherence of PPG's forward-looking portfolio and strategy may take time to be recognized.

The price target of $152 reflects an 11.7 times multiple on the firm’s projected 2024 EBITDA for PPG, which is slightly below the 12.0 times average multiple observed over the past ten years. This target suggests a conservative view on the stock's near-term valuation as the market grapples with assigning an appropriate multiple.

Following the recent analysis by Evercore ISI, investors may find additional context through InvestingPro real-time data and insights. PPG Industries currently has a market capitalization of $30.7 billion and is trading at a P/E ratio of 22.08, which indicates a premium valuation compared to its near-term earnings growth potential. The company’s revenue for the last twelve months as of Q1 2024 stands at $18.18 billion, with a moderate revenue growth of 2.56%. Despite a slight quarterly dip, the company’s gross profit margin remains robust at 41.97%.

InvestingPro Tips highlight PPG's strong track record of dividend payments, having maintained them for 54 consecutive years, which is a testament to its financial stability and commitment to shareholders. Additionally, the company is expected to be profitable this year, as evidenced by the last twelve months' performance. However, it's worth noting that 6 analysts have revised their earnings expectations downwards for the upcoming period, which could be a point of consideration for investors.

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For those interested in a deeper analysis, there are additional InvestingPro Tips available that could provide further insights into PPG's financial health and market position. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and explore the full range of tips that could help in making more informed investment decisions.

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