We project EPS dilution at a rate of $0.10+ per annum. We decrease our 2017 EPS estimate by $0.08 to $6.22, including $1.88E for 2Q17 down from $1.91E previously. Likewise, we trim our 2018 EPS estimate by $0.10 to $6.60 from $6.70. Our price target remains unchanged at $123, which implies total upside potential of 13%, including a dividend yield of 1.4%. PPG now trades at a 2017 P/E multiple of 17.8x, which represents a discount of 4.2x or 20% vs. the average of three US coatings peers (SHW, AXTA and RPM). Importantly, this discount would widen to ~30% pro forma for deployment of PPG’s excess capital vs. coatings peers. As a reminder, 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 $124. Using our relative P/E framework wherein we apply a 10% premium to the S&P500 multiple, we calculate warranted value of $122 per PPG share.
Background: On 26 May PPG announced the last of a long line of Glass divestitures: a definitive agreement to divest its US fiberglass operations to Nippon Electric Glass Co. Ltd. (NEG) for $545mn. We expect this deal to close in 3Q17, although PPG will reclassify the business as a discontinued operation for 2Q17. We had this business generating 2017 sales of $342mn with associated EBITDA of $51mn, which would apply a multiple of 10.7x 2017E EBITDA (estimate, multiple not disclosed). We believe the business had a very low tax basis, so we project after-tax cash proceeds of $350mn. In a separate transaction that closed on 2 June, PPG completed the sale of Plaka (plasterboard and cement-board) to Knauf International GmbH. Financial terms were not disclosed, but we estimate that Plaka contributed sales of $30mn to PPG’s Performance Coatings segment with associated EBITDA of ~$3mn.