The Institutions Buy PPG Industries Despite Weak Guidance
The institutional activity in PPG Industries (NYSE: PPG) has been a little mixed over the past year but the net activity is bullish and supports the stock. The institutions have been net buyers for 3 of the last 4 quarters and 7 of the last 8 and hold nearly 80% of the stock. Their activity hit a low at the end of last year, however, but has only accelerated since. The last two quarters have seen total activity, total buying, and net buying all increase, and the total buying hit a multi-year high in Q2 2022. Notably, the activity in early Q3 has been light but is picking up in the wake of the Q2 earnings release and is bullish as well. Assuming the institutional activity continues in line with the trend, we see the stock moving above the $134 level once again.
The analyst’s sentiment is a little mixed as well but also firmly biased in favor of higher prices. The consensus sentiment is a Moderate Buy and firming from a Hold that was put in place at the end of the last quarter. The $157 consensus price target is softening, however, but still forecasts about 25% of upside for the stock including the post-earnings release activity. There have been at least 5 analysts’ notes out including 3 lower price targets and 2 higher. The consensus of these 5 is about $143 or 13% above the current price action but it does include a new low target. The new low is $110 and it suggests the stock is overvalued.
PPG Industries Has OK Quarter Despite Mixed Reviews
PPG Industries had an OK quarter despite the mixed reviews and we say “OK” because the results are underpinned by higher prices. The company reported $4.7 billion in net revenue for a gain of 7.8% over last year and it beat the consensus by $0.04 but the gains are entirely due to higher realized prices. The company says organic sales are up 8% and driven by a 15% increase in prices versus two years ago. On a segment basis, both the Performance Coatings Group and Industrial Coatings Group reported YOY declines in volume that were offset by higher prices. The bad news is that higher prices are cutting into the top line and will eventually result in a revenue/earnings decline. The good news is that PPG is rebuilding its margin and producing solid cash flow for investors.
Moving down to the income, the company reported a 200 basis point sequential improvement in the margin that helped drive solid results on the bottom line. The company reported a slight $0.06 YOY improvement in the GAAP results but the adjusted $1.81 is down from last year’s $1.94 but beat the consensus by a dime. The takeaway here is the 1.85% dividend yield is safe and the status of Dividend King should be reached with the next distribution declaration, an increase that could be worth 8% to 10% to investors.
“In the second half of the year, we expect several of our larger businesses, including automotive original equipment manufacturer (OEM) and aerospace coatings, to deliver strong growth due to large current supply deficits and low inventories in these end-use markets. Importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue in the third quarter as we work back to our historical margins, and our adjusted earnings will increase on a year-over-year basis,” says CEO Michael H. McGarry.
The Technical Outlook: PPG Is Testing Resistance
PPG Industries’ share prices popped in the wake of the Q2 release and confirmed the presence of resistance. The resistance could be strong but the bias in price action is upward so we see a battle brewing between the bulls and the bears. Assuming the market can get above the $134 level the price could easily reach $160 to $170. If not, this market may remain range bound until there is more clarity on economic activity later in the year and early next year.