PPG Industries

PPG delivered its sixth consecutive quarter of organic sales growth, up 4% on equal contributions from volume and pricing. Adjusted EPS of $2.23 missed FactSet consensus by $0.02, and shares fell 6% as weaker-than-expected margins overshadowed solid sales growth.

Why it matters: The market’s reaction appears to have focused too heavily on this quarter's earnings miss, while overlooking PPG’s broad-based growth. PPG outpaced overall industry growth by 300 basis points and delivered organic growth in eight of its nine businesses, demonstrating its ability to maintain growth momentum despite a challenging geopolitical and demand environment. Automotive refinish was the only business to decline, with organic sales down double digits as insurance claims recovered more slowly than expected. Claims fell by a mid-single-digit percentage over the past two quarters, versus double-digit declines last year, suggesting a gradual normalization despite the slower pace. Aerospace and protective and marine coatings were once again the key highlights, with both businesses delivering double-digit organic sales growth.

The bottom line: We are maintaining our $120 per share fair value estimate for narrow-moat PPG, as our long-term outlook remains unchanged. Shares are currently trading at around a 7% discount to our valuation.

Coming up: Raw material inflation linked to the tensions in the Middle East remains a near-term concern, but PPG has moved quickly to make price adjustments globally. The company raised prices across all its businesses, offsetting roughly 90% of cost inflation during the quarter. With management expecting to fully recover the remaining pressure by the end of this year, we view the impact as manageable, although the timing of price realization could still weigh on near-term margins.

We are maintaining our fair value estimate of $120 per share. Over our 5-year forecast horizon, we continue to expect solid growth and profitability, with consolidated revenue forecast to grow at a 3.8% compound annual rate and operating margins expanding by about 230 basis points. PPG’s diversified exposure across end markets and geographies provides a degree of resilience, as weakness in any single industry is often partially offset by strength elsewhere. Our revised valuation implies a fiscal 2026 forward EV/EBITDA multiple of around 11.3 times and a forward P/E multiple of 15.2 times.

We forecast the performance coatings segment to grow at a 4.4% 5-year compounded growth rate, primarily driven by aerospace. PPG is a clear leader in this market, offering a broad suite of products, including coatings, sealants, adhesives, and transparencies - allowing it to capture a larger share of wallet relative to peers. With roughly half of aerospace exposure tied to OEM and the remainder to the aftermarket, the segment benefits from both elevated aircraft build rates and a structurally growing installed base, which supports recurring maintenance demand. As a result, we model high-single-digit growth in the near to medium term. Within auto refinish, near-term demand has been pressured by lower collision frequency, as rising insurance costs and the risk of premium increases have reduced claim activity. Despite this, we expect PPG to outpace the market by gaining market share over the long term. The company’s focus on productivity-enhancing solutions, such as its LINQ digital ecosystem and DigiMatch color-matching technology, helps improve body shop efficiency and throughput, reinforcing customer stickiness. In our view, this differentiated value proposition positions PPG to deliver above-market growth even in a subdued demand environment.

We forecast the industrial coatings business to grow at a 5-year compounded growth rate of roughly 2.6%. Demand in this segment is closely tied to broader industrial production, particularly in auto OEM and general industrial end markets. Within auto OEM, we expect modest growth as increasing electric vehicle penetration supports incremental coatings demand, with PPG benefiting from partnerships with several manufacturers in China, such as BYD and Xiaomi. That said, we expect overall growth in the segment to largely track underlying end-market activity.

We forecast global architectural coatings to grow at a 4.8% 5-year compounded growth rate, supported by a recovery in Mexico, PPG’s largest market within the segment. The retail channel, which accounts for over 70% of sales in Mexico, has already shown solid momentum, while the project-related portion is beginning to show early signs of improvement after a more subdued period. PPG’s strong positioning in the region, underpinned by the Comex brand’s leading market share, supports both volume growth and pricing resilience.

The second stage of our valuation model assumes PPG can generate an average of 16.7% return on new invested capital and 5% earnings before interest growth (implying a 30% reinvestment rate) for 10 years after our five-year explicit forecast period.

We assign PPG Industries a narrow moat and we believe the firm should be able to generate economic returns above its weighted average cost of capital for at least the next 10 years. We estimate return on invested capital to average 14.2% over our 5-year forecast period, which is well above our weighted average cost of capital of 8%.

We assign the performance coatings segment a narrow moat based on intangible assets and switching costs. More than 75% of segment sales are tied to aftermarket and maintenance activity across automotive refinish, aerospace, protective and marine coatings, and traffic solutions. Products in these markets must meet demanding performance, durability, and regulatory requirements and often require extensive testing and qualification before being adopted. Once integrated into customer processes, reliability and consistency generally matter more than price, thus limiting substitution.

Switching costs are particularly strong in aerospace and marine coatings. Aircraft coatings provide corrosion protection and contribute to structural durability and fuel efficiency and are incorporated into certified material systems for individual platforms. Once specified by OEMs such as Boeing and Airbus and approved under applicable regulatory requirements, coatings are often retained for the life of a program, which can span decades. Switching suppliers can require extensive testing, validation, and requalification and can disrupt production. Marine coatings exhibit similar characteristics. They protect ships and offshore assets from corrosion and fouling, and poor coating performance can increase fuel consumption, maintenance requirements, and downtime.

Automotive refinish also exhibits meaningful switching costs through integration across equipment, workflow, and software. Body shops using PPG paints typically invest in mixing and tinting systems and application equipment calibrated to PPG formulations. Changing suppliers can therefore require new equipment, employee retraining, and disruption to shop operations. PPG’s LINQ digital ecosystem further embeds the company into customer workflows through color formulation, job tracking, and productivity tools. When paint, hardware, and software are integrated into daily operations, switching becomes increasingly costly.

PPG also benefits from strong positions across these markets, including leading shares in aerospace and traffic solutions and the number two position in automotive refinish. Customers place significant weight on proven performance and reliability, reinforcing PPG’s brand and supporting pricing power. Performance coatings consequently generates the highest margins within the company.

We assign the industrial coatings segment a narrow moat, primarily based on switching costs. The segment supplies coatings used in automotive OEM, general industrial, packaging, and specialty applications. These products are embedded within production lines and must meet strict technical specifications, making supplier changes disruptive once a system has been established. Automotive OEM coatings provide a clear example. Suppliers are often retained for multiple years because manufacturers rely on coating systems in which different layers must be chemically compatible. Changes in formulation, viscosity, or curing temperatures can require plant recalibration and create the risk of defects or production downtime. Similar dynamics exist in packaging coatings, where products must meet stringent stability and safety requirements. Supplier changes can require additional validation and, in some cases, regulatory review, making switching time-consuming and operationally disruptive.

Pricing power is more limited in industrial coatings because some contracts include raw-material indexation. These agreements allow PPG to pass through changes in input costs but reduce its ability to independently raise prices beyond movements in underlying raw materials.

We assign the global architectural coatings segment a narrow moat based on intangible assets. Following the 2024 divestiture of the US and Canada business, the segment operates across EMEA, Latin America, and Asia-Pacific, with Mexico representing a significant portion of sales. PPG holds a leading position in Mexico through Comex, the country’s largest architectural coatings brand. Comex operates through a concessionaire network in which independently owned stores primarily sell PPG products under exclusive or quasi-exclusive arrangements, giving the company greater control over distribution and pricing than traditional retail channels.

Architectural coatings markets outside North America remain relatively fragmented, with a greater mix of local and regional competitors and less consolidated distribution. Despite this, PPG maintains strong positions in several markets, including leadership in Mexico and the number-two retail position across parts of Europe, the Middle East, and Africa.

PPG has also demonstrated an ability to offset raw material inflation through pricing. In 2022, higher energy, resin, solvent, freight, and logistics costs drove material inflation into the mid-single digits, while PPG implemented price increases exceeding 12%, largely offsetting these pressures. More recently, higher oil prices and disruptions across the chemicals value chain have again increased input costs, and PPG has announced further pricing actions to offset anticipated inflation. We view the company’s repeated ability to implement price increases while maintaining its market positions as evidence of brand strength and support for the segment’s intangible asset moat source.

The company operates across a diverse range of end markets, resulting in stable earnings even during industry-specific slowdowns.

Aerospace is a high-growth end market, supported by elevated aircraft build rates and a growing installed base that should drive strong aftermarket demand, and we think PPG is well-positioned to benefit from this momentum given its broad aerospace product suite.

Management has demonstrated a willingness to exit underperforming assets and redeploy capital toward higher return opportunities, while maintaining consistent shareholder returns.

PPG generates a significant portion of revenue outside the US, leaving results exposed to currency volatility.

Despite a diversified customer base, PPG's profitability is not immune to economic slowdowns, as seen in 2008 and 2009, when operating margin dropped below 10% for the first time in a decade.

The strategy of divesting lower-margin assets and reinvesting in higher-value coatings carries execution risk.