Company Reports

Narrow-moat PPG reported first-quarter results that came with few surprises. While sales growth was roughly flat compared with a year ago, PPG generated margin expansion despite tepid demand from architectural and industrial end markets. While we expect some headwinds through the year, sequential improvements in industrial and new single-family housing starts should provide some relief. Additionally, first-quarter strength in China and India offers some optimism as European coatings end markets remain muted. We've increased our fair value estimate to $118 from $117 per share due to time value of money.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Narrow-moat-rated PPG announced on Feb. 26 that it will review strategic alternatives for its US and Canada architectural coatings business. This business accounted for roughly 10% of sales in 2023 and includes some of PPG’s most recognized architectural brands like Glidden and Olympic. Management said the review could result in a multitude of outcomes, including no action at all. A sale, spinoff, joint venture, or other alternatives remain on the table. While it’s unclear if PPG would receive regulatory approval to sell its architectural business to a North American competitor, other options could prevent potential regulatory issues. We are maintaining our $117 fair value estimate for the shares for now. We will revisit our valuation assumptions once details of any deal are disclosed.

Narrow-moat PPG capped off a strong year with solid fourth-quarter results that were largely in line with our expectations. PPG navigated a challenging year when higher interest rates constrained its architectural coatings business and tepid industrial production hampered its industrial coatings segment. That said, PPG was able to largely offset this through strength in aerospace, automotive OEM (original equipment manufacturing), and protective coatings, while moderating input costs and higher selling prices drove margin expansion. While interest-rate headwinds are likely to persist for much of 2024, we think continued strength from aerospace, automotive refinish, and PPG’s Mexico business will lead to low mid-single-digit revenue growth and improved earnings. As such, we have maintained our $117 fair value estimate.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

Narrow-moat PPG reported solid third-quarter results that were largely in line with our expectations. PPG is navigating a challenging operating environment where higher interest rates weigh on architectural paint demand and global industrial production remains soft in most regions. That said, PPG's price increases and strength in smaller markets like automotive original equipment manufacturer, or OEM, and aerospace have helped offset these challenges. Management noted raw material availability and supply chain conditions continued to improve and have moderated to historical levels, which we think should provide some margin relief going into next year. We've increased our fair value estimate to $117 from $115 per share due to time value of money.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Narrow-moat PPG reported mixed second-quarter results, as continued volume pressure across its portfolio was met with strong price growth. Softening demand for architectural coatings globally along with a slower recovery in China weighed on volume, but favorable pricing provided a tailwind for margin growth. Despite challenges, management noted continued improvement in its supply chain and raw material availability, an encouraging development given the challenges both have posed in the last few years. We've increased our fair value estimate to $115 from $114 per share due to time value of money.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Narrow-moat PPG reported first-quarter results that were largely in line with our expectations. While demand across its end markets remains mixed, the company continues to push through price increases, with selling prices rising 8% year over year. Price growth continues to drive the story for PPG as overall demand tempers, leading to a roughly 3% decline in volume year over year. Moreover, management noted a slowdown in raw material cost increases and additional improvements in availability. This is a welcome change for PPG, and we think it will provide an opportunity for margin expansion through the year. We've increased our fair value estimate to $114 from $112 per share due to time value of money.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Narrow-moat PPG reported solid fourth-quarter results, where strong pricing gains were met with lower sales volume and continued inflationary pressure. While raw material availability continues to improve, raw material inflation has shown little sign of slowing. That said, management noted that selling price increases have almost offset raw material cost increases since over the last 2 years, which we think will provide an opportunity for margin expansion in 2023.

PPG Industries is a globally diversified producer of paints and coatings. The company is the world's largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG's products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.