PPG's Resilient Pricing And Geographic Mix Fuels Optimism For 2H23 And Beyond, Says Analyst

BMO Capital Markets analyst John P. McNulty reiterated Outperform rating on PPG Industries, Inc. PPG, raising the price target to $165 from $158.

The company recently reported Q2 2023 net sales of $4.87 billion, beating the consensus of $4.84 billion. The company witnessed organic sales growth of 4% Y/Y, aided by higher selling prices.

The analyst notes that PPG put up another solid quarter, with earnings benefiting from falling raw mats for the first (but certainly not the last) time. 

Also Read: PPG Industries Tops Q2 Estimates, Raises FY23 Outlook

With several solid end markets and improving price/raws that should drive margin expansion, McNulty expects PPG to deliver double-digit EPS growth in 2H23, 24, and 25.

The analyst expects PPG margins to expand on a y/y basis (up ~160bps in Q3 and ~110bps in Q4).

PPG indicated that pricing has proven more resilient than expected, coming in ~30bps better than expected for the quarter.

Management believes its geographic mix will prove positive for PPG in 2H23 and 2024. 

The analyst thinks that this comes from a Chinese recovery that, while more muted than expected to start the year, is recovering, and PPG has indicated the data it is seeing points to a positive 2024 for China. 

For the U.S., the analyst thinks that prospects for growth are a mixed bag. However, McNulty believes there are enough pockets of resiliency in refinish, aero, and auto OEM to offset weakness in arch coatings, gen industrial, and traffic solutions.

Based on the above, the analyst raised Q3 EPS to $1.91 ( from $1.88), reflecting a better top line in Performance Coatings (namely refinish, aerospace) as well as margins (15.7% up from previous 15.0%).

For FY23, McNulty forecasts EPS of $7.40 (vs. guide of $7.28-7.48) on similar drivers.

The analyst's forecast for FY24 EPS inches higher to $8.58 (from $8.57). For FY25, the analyst predicts EPS of $9.58 (from $9.35).

Price Action: PPG shares are trading lower by 2.26% to $145.98 on the last check Monday.