Construction Stocks

PPG Industries Inc Valuation – August 2016 $PPG

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how PPG Industries Inc (PPG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): PPG Industries, Inc. (PPG) manufactures and distributes a range of coatings, specialty materials and glass products. PPG operates through three business segments: Performance Coatings, Industrial Coatings and Glass. The Performance Coatings segment consists of the refinish, aerospace, protective and marine, architectural-Americas and Asia Pacific, and architectural-EMEA coatings businesses. The Industrial Coatings segment consists of the automotive original equipment manufacturer (OEM), industrial coatings, packaging coatings, and specialty coatings and materials businesses. Industrial, automotive OEM, packaging coatings, and specialty coatings and materials products are formulated specifically for the customers’ needs and application methods. The Glass segment consists of the flat glass and fiberglass businesses. The Company’s brands include SIKKENS, PPG PITTSBURGH PAINTS, MULCO, FLOOD, LIQUID NAILS, SICO, CIL, RENNER, TAUBMANS, WHITE KNIGHT and BRISTOL.

PPG Chart

PPG data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PPG – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,616,674,621 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.62 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 251.50% Pass
6. Moderate PEmg Ratio PEmg < 20 16.37 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.26 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.62 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.62 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

PPG value chart August 2016

EPSmg $6.38
MG Growth Estimate 15.00%
MG Value $245.66
Opinion Undervalued
MG Grade B+
MG Value based on 3% Growth $92.52
MG Value based on 0% Growth $54.24
Market Implied Growth Rate 3.94%
Current Price $104.46
% of Intrinsic Value 42.52%

PPG Industries, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.63 in 2012 to an estimated $6.38 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.94% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into PPG Industries, Inc. revealed the company was trading above its Graham Number of $49.66. The company pays a dividend of $1.48 per share, for a yield of 1.4% Its PEmg (price over earnings per share – ModernGraham) was 16.37, which was below the industry average of 28.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-17.82.

PPG Industries, Inc. performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

PPG charts August 2016

Net Current Asset Value (NCAV) -$17.82
Graham Number $49.66
PEmg 16.37
Current Ratio 1.62
PB Ratio 5.26
Current Dividend $1.48
Dividend Yield 1.42%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $7,107,000,000
Total Current Liabilities $4,375,000,000
Long-Term Debt $4,426,000,000
Total Assets $17,248,000,000
Intangible Assets $5,675,000,000
Total Liabilities $11,902,000,000
Shares Outstanding (Diluted Average) 269,100,000

Earnings Per Share History

Next Fiscal Year Estimate $5.46
Dec2015 $5.14
Dec2014 $7.52
Dec2013 $11.13
Dec2012 $3.03
Dec2011 $3.44
Dec2010 $2.32
Dec2009 $1.02
Dec2008 $1.63
Dec2007 $2.52
Dec2006 $2.14
Dec2005 $1.75
Dec2004 $1.98
Dec2003 $1.45
Dec2002 -$0.21
Dec2001 $1.15
Dec2000 $1.79
Dec1999 $1.62
Dec1998 $2.24
Dec1997 $1.97
Dec1996 $1.97

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.38
Dec2015 $6.58
Dec2014 $6.69
Dec2013 $5.58
Dec2012 $2.63
Dec2011 $2.35
Dec2010 $1.85
Dec2009 $1.68
Dec2008 $2.00
Dec2007 $2.12
Dec2006 $1.75
Dec2005 $1.45
Dec2004 $1.27
Dec2003 $1.00
Dec2002 $0.96
Dec2001 $1.61
Dec2000 $1.87

Recommended Reading:

Other ModernGraham posts about the company

18 Companies in the Spotlight This Week – 3/15/15
PPG Industries Inc. Annual Valuation – 2015 $PPG
32 Companies in the Spotlight This Week – 12/6/14
PPG Industries Inc. Quarterly Valuation – December 2014 $PPG

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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