The world’s second largest paint coating manufacturer, PPG Industries (PPG), reported record financial growth in the most recent quarter. But the stock has seen only modest price gains year-to-date. The question is, will the stock gain momentum in the near term to reflect its robust financials? 

PPG Industries, Inc. (PPG - Get Rating) is the world’s second largest paint coatings company and is ranked #209 on the Fortune 500 list. Its shares have gained 74% over the past year, and 6.8% year-to-date.

The stock surged 5.2% in aftermarket trading  following its record quarterly earnings release on January 21. PPG’s revenues have increased 15% year-over-year to a record $3.9 billion in its fiscal first quarter, ended March 31, 2021. Its EPS rose nearly 54.9% from its  year-ago value to $1.58.

The paint industry is expected to grow significantly in 2021 as industrial and commercial construction picks up nationwide. This could allow PPG to report new highs this year.

Here’s what we think could shape PPG’s performance in the near term:

Industry Tailwinds

PPG is the second largest paint company in the world in terms of revenues. The company stands to benefit significantly from the White House’s proposed infrastructure spending  package because   rising construction demand will likely translate into higher demand for paints also.  PPG specializes in industrial coatings and performance coatings, having applications in both industrial and housing construction markets.

With  rising housing demand driving  increased construction demand because the real estate markets currently face lean inventories, demand for PPG’s products is expected to rise significantly in the near term. Moreover, President Biden’s proposed  $2 trillion-plus infrastructure bill, labelled a “once-in-a-lifetime” generational opportunity, could  help PPG become a trillion-dollar business over the  long term.

Robust Profitability

PPG’s 44.03% trailing-12-month gross profit margin is 53.3% higher than the industry average 28.72%. Its trailing-12-month EBIT and net income margins of 12.09% and 7.66%, respectively, are significantly higher than industry averages. And its levered free cash flow of 11.64% is 32.2% higher than the industry average  8.81%.

PPG’s trailing-12-month ROE, ROA and ROTC of 19.25%, 5.42% and 8.83%, respectively, compare favorably with industry averages. The company’s asset turnover ratio of 0.74% is 17.6% higher than the industry average of 0.63%.

Strong Liquidity and Balance Sheet

PPG’s trailing-12-month net operating cash flow and levered free cash flow came in at $2.13 billion and $1.61 billion, respectively. Its total cash balance is $1.93 billion. Though the company has a relatively high trailing-12-month total debt of $6.61 billion, its  robust cash flows indicate low credit risk.

PPG’s debt/free cash flow ratio was  3.45, while its covered ratio stood at 12.12.

Consensus Rating and Price Target Indicate Potential Upside

PPG has an average broker rating of 1.58, indicating favorable analyst sentiment. Of 24 Wall Street analysts that rated the stock, 17 rated it Buy, while seven rated it Hold.

Analysts expect the stock to hit $157.36 soon, indicating a 3.9% potential upside.

POWR Ratings Reflect Rosy Prospects

PPG has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

PPG has a B grade for Quality. This is justified, given the company’s higher-than-industry profit margins.

Of the 98 stocks in the A-rated Chemicals industry, PPG is ranked #47. In addition to the grades I’ve highlighted, one  can check out PPG Ratings for Value, Growth, Momentum, Sentiment, and Stability here.

Click here to view the top-rated stocks in the Chemicals industry.

Bottom Line

As the U.S.  recovers from the pandemic-led recession and enters a period of economic growth, PPG is expected to grow substantially. Thus, we think PPG is an ideal investment bet now.

PPG shares were trading at $168.42 per share on Friday afternoon, up $14.45 (+9.38%). Year-to-date, PPG has gained 17.24%, versus a 11.75% rise in the benchmark S&P 500 index during the same period.