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 5 Most Undervalued Companies for the Defensive Investor – February 2015. 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 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, optical and specialty materials and glass products. It is a supplier of protective and decorative coatings. PPG operates in five business segments, which includes Performance Coatings, Industrial Coatings, Architectural Coatings-EMEA (Europe, Middle East and Africa), Optical and Specialty Materials, and Glass. The Performance Coatings, Industrial Coatings and Architectural Coatings- EMEA segments supply protective and decorative finishes for customers in a range of end use markets, including industrial equipment, appliances and packaging; factory-finished aluminum extrusions and steel and aluminum coils; marine and aircraft equipment; automotive original equipment; and other industrial and consumer products. The Optical and Specialty Materials segment consist of the optical products and silicas businesses. The Glass business segment consists of the flat glass and fiber glass businesses.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $227.67 |
| MG Value | $515.34 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $194.09 |
| Value Based on 0% Growth | $113.78 |
| Market Implied Growth Rate | 4.25% |
| Net Current Asset Value (NCAV) | -$39.98 |
| PEmg | 17.01 |
| Current Ratio | 1.40 |
| PB Ratio | 6.10 |
Balance Sheet – December 2014
| Current Assets | $6,850,000,000 |
| Current Liabilities | $4,876,000,000 |
| Total Debt | $3,544,000,000 |
| Total Assets | $17,583,000,000 |
| Intangible Assets | $6,212,000,000 |
| Total Liabilities | $12,403,000,000 |
| Outstanding Shares | 138,900,000 |
Earnings Per Share
| 2014 | $15.03 |
| 2013 | $22.27 |
| 2012 | $6.06 |
| 2011 | $6.87 |
| 2010 | $4.63 |
| 2009 | $2.03 |
| 2008 | $3.25 |
| 2007 | $5.03 |
| 2006 | $4.27 |
| 2005 | $3.49 |
| 2004 | $3.95 |
Earnings Per Share – ModernGraham
| 2014 | $13.39 |
| 2013 | $11.17 |
| 2012 | $5.27 |
| 2011 | $4.70 |
| 2010 | $3.69 |
| 2009 | $3.35 |
Dividend History
Conclusion:
PPG Industries Inc. is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the the low current ratio, and the high PB ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.69 in 2010 to $13.39 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of a 4.25% annual earnings over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on PPG Industries Inc. (PPG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in PPG Industries Inc. (PPG) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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