PPG Industries: Navigating Near-Term Headwinds to Unlock Long-Term Value

Investors often face a dilemma when earnings warnings emerge: Is the dip a fleeting setback or a harbinger of deeper issues? For PPG Industries (PPG), the anticipated 11.2% year-over-year decline in Q2 2025 adjusted EPS to $2.22 presents a similar crossroads. While the near-term numbers are challenging, the story here is less about short-term pain and more about whether PPG's strategic shifts and undervalued stock price position it to outperform over the next 12–18 months. Let's dissect the catalysts and risks to determine if this cyclical industrial leader is worth buying now.

The Near-Term EPS Decline: A Symptom, Not the Disease

The projected Q2 2025 EPS drop to $2.22 from $2.50 in Q2 2024 reflects broader macroeconomic pressures and uneven demand across PPG's segments. Revenue is also expected to fall 13.2% to $4.16 billion, driven by softness in the Global Architectural Coatings and Industrial Coatings divisions. These declines are no surprise—construction and manufacturing sectors remain sluggish in key markets, and PPG has been vocal about pricing headwinds in commoditized products.

However, the Q1 2025 results offer a glimmer of hope. Despite overall revenue declines, PPG's Performance Coatings segment (aerospace, automotive refinish, and packaging) saw a 6% volume increase, contributing to a 6.2% EPS beat. This segment's resilience highlights PPG's ability to navigate volatility by focusing on niche, high-margin markets. The question now is whether this strength can offset ongoing softness in other areas during Q2.

Strategic Divestitures: Cutting Fat to Fuel Growth

PPG's decision to divest its Architectural Coatings business to American Industrial Partners for $550 million is a textbook example of sharpening focus. By shedding a lower-margin, cyclical segment, PPG can redirect capital and resources to higher-growth areas like aerospace, where it holds a dominant position, and advanced materials for electric vehicles. This move also reduces exposure to residential construction cycles, a key source of Q2 revenue weakness.

The proceeds from the sale, coupled with cost-cutting initiatives, should bolster margins. Analysts project a gradual recovery in adjusted EPS to $7.89 for fiscal 2025 and a 7.5% jump to $8.48 in 2026. While not explosive growth, this trajectory aligns with PPG's strategy of prioritizing profitability over volume.

Valuation: A Discounted Stock with a Bullish Price Target

PPG's stock has underperformed the broader market, down 8.6% over the past year versus the S&P 500's 12.6% gain. This underperformance has created a valuation gap: shares currently trade at ~$115, nearly 10% below the average analyst price target of $128.19. With a dividend yield of 2.1%—modest but stable—the stock offers income and upside potential.

The "Moderate Buy" consensus rating reflects cautious optimism. While 16 analysts hold the stock, 9 recommend a "Strong Buy," suggesting a growing bullish faction. Bulls argue that PPG's undervaluation relative to its peers and the potential for margin expansion post-divestiture justify a rebound.

Catalysts to Watch in Q2 and Beyond

1. Performance Coatings Dominance: If aerospace and automotive refinish demand holds steady, PPG could surprise to the upside. The segment's Q1 outperformance suggests resilience in premium markets.
2. Cost Management: PPG has consistently used operational efficiencies to mitigate top-line pressures. A narrower-than-expected EPS miss could reduce investor pessimism.
3. Dividend Sustainability: The $0.68 quarterly dividend (a yield of 2.1%) remains safe for now, but margin improvements will be critical to maintaining it amid macro challenges.

Risks and the Bear Case

Bears will point to PPG's mixed earnings track record—beating estimates in only two of the past four quarters—and the risk of further margin compression if raw material costs rise. The Global Architectural Coatings division's struggles also underscore reliance on cyclical industries, which could prolong underperformance.

Investment Thesis: Buy the Dip, but Monitor Earnings Quality

PPG's near-term struggles are real, but the stock's discounted valuation and strategic clarity create a compelling risk-reward profile. The $128 price target implies ~11% upside, while the dividend offers a modest buffer. Investors should focus on Q2's earnings narrative:

• Positive Surprise Scenario: If PPG beats the $2.22 EPS estimate—even slightly—shares could rally as the market revalues the stock toward targets.
• Negative Surprise Scenario: A miss could test the $100 level, but such a drop would likely prompt buying from value investors given the company's long-term fundamentals.

Final Call: Hold for the Long Game

PPG isn't a high-growth darling, but its disciplined strategy—selling non-core assets, focusing on high-margin segments, and maintaining a dividend—positions it to outperform in a cautious market. For investors with a 12–18-month horizon, the stock's valuation discount and strategic shifts make it a "Moderate Buy." Monitor Q2 results closely, but don't let short-term noise distract from the broader opportunity.

Action Items for Investors:
1. Use dips below $110 as accumulation opportunities.
2. Avoid overreacting to a Q2 miss unless margins deteriorate sharply.
3. Track the performance of Performance Coatings and industrial margins in Q3.

In a market where patience is rewarded, PPG's disciplined approach may just turn today's headwinds into tomorrow's tailwinds.