PPG Industries (PPG: Buy, $130 PT) 
Lights at End of Tunnel

• We affirm our Buy on PPG after visiting with management. We caught up with senior management on Monday, including CEO Michael McGarry, CFO Vince Morales, SVP Tim Knavish, CTO David Bem, President, Asia Pacific Mike Horton, VP, US & Canada Architectural David Cole and numerous other executives. In our various discussions, we detected somewhat greater optimism than we would have anticipated, particularly on the subject of prospective volume growth. In this context, we reiterate our Buy on PPG shares and affirm our target of $130, which suggests upside potential of 12% including a dividend yield of 1.5%.

• PPG may be ushering in a new era of growth. Management generally expressed a confident tone regarding prospects in Protective, Industrial, Packaging, Refinish and company-owned stores within Architectural Coatings, although trends remain sub-par in selected markets, such as Auto OEM and Architectural-DIY. On balance though, our belief is that PPGs volume growth of 3.0% in 4Q— the company’s best result in three years — is more likely to be the beginning of a new paradigm after three years of rather anemic growth, than...

• We expect Auto Refinish to remain a great business for many years to come. Following negative sales trends suffered by peer Axalta in 1H17, investors began to question whether something has changed for the worse, fundamentally, in Refinish. We believe the answer to that question is “no”. PPG continues to enjoy reliable price increases, facilitated by...

• Architectural Coatings outlook appears mixed. Commentary regarding company-owned stores was positive, especially with regard to non-residential markets. Here, PPG brands are being specified 50% more often after the company added 40 employees to focus on this effort last year. This effort will continue in 2018 with plans to add an additional 20-25 people. Of course, salespeople still need to convert these specifications to new orders after a typical lag time of 6-18 months for construction. Elsewhere… 

• PPG is winning in Packaging Coatings. Within the realm of Packaging Coatings, PPG had focused historically on coatings for the outside of food and beverage cans, whereas competitors Valspar and Akzo dominated “inside the can”. In recent years however, PPG has developed and commercialized technology for bisphenol-A non-intent (BPA-NI) coatings to address consumers’ environmental concerns regarding exposure to BPA. This effort is proving to be successful. Nowadays, PPGs penetration...

• Protective and Marine Coatings (PMC) prospects look good through 2019+. PPG is growing its Protective Coatings business at a double-digit pace in Asia. This is skewing PPGs business mix within PMC further toward Protective vs. Marine Coatings, consistent with the company’s strategy. Meanwhile...

• We affirm our Buy rating and $130 price target. Our price target reflects total upside potential of 12%, including a dividend yield of 1.5%. PPG now trades at a 2018 P/E multiple of 18.0, which represents a discount of 3.4x or 16% vs. the average of three US coatings peers (SHW, AXTA and RPM). Importantly, we estimate that this discount would widen to ~35% pro forma for deployment of PPG’s excess capital vs. coatings peers. Likewise, PPG trades at 12.0x our 2018 estimate of EBITDA, or a discount of 1.4x vs. the average of US coatings peers. Our valuation of PPG is based on an average of two methodologies: DCF analysis and a relative P/E framework. Our DCF analysis suggests a warranted stock price of $131, based on a WACC of 7.8%. Using our relative P/E framework, wherein we apply a 5% premium to the S&P500 multiple, we calculate warranted value of $129 per PPG share.

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