PPG Industries Removed From Goldman's Buy List, Downgraded To Neutral Citing No Near-Term Catalysts

The negative preannouncement by PPG Industries, Inc. PPG on October 7, which was the first in eight years, had an adverse impact on investors who have become accustomed to a “defensive earnings base and stable DD EPS growth.”

Goldman Sachs’ Robert Koort downgraded the rating on the company from Buy to Neutral, while lowering the price target from $111 to $103.

Lacking Catalysts

Following the 10 percent selloff in the stock, Koort noted that the valuation was now at a multi-year low, which was difficult to justify, given PPG Industries’ robust free cash flow yield and the materially higher peer valuations.

However, the analyst believes that with the moderating global auto OEM SAAR, persisting lackluster growth in Europe and the weak Q4 EPS guidance, there do not appear to be any catalyst for the stock in the near term.

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Margins Have Peaked

“PPG’s negative pricing in 3Q highlights the difficulty it may face as large sophisticated customers push back against future pricing actions to offset our expectation for raw material inflation,” Koort mentioned.

The analyst, therefore, believes that the company’s margins have peaked and sales growth would be challenging.

The FY17 EPS estimate has been lowered to reflect continues sluggishness in Europe, along with pricing deflation and moderating auto OEM SAAR.

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