On Thursday, UBS adjusted its stance on PPG Industries (NYSE:PPG), the global supplier of paints, coatings, and specialty materials. The firm's analyst shifted the rating from Buy to Neutral and set a new price target at $156, down from the previous $173. The revision follows PPG Industries' announcement of a strategic review of its North American architectural coatings division, which accounts for approximately 10% of the company's sales.
The strategic review, according to UBS, signals potential headwinds for PPG Industries' medium-term growth. The management's rationale for the review is understood, as it addresses segments with lower margins and growth. However, this move also underscores the broader challenges within the company's operations.
UBS acknowledges the likelihood of a resurgence in the U.S. residential market but notes that PPG's distribution mix, which leans heavily towards DIY and commercial channels, might experience a slower recovery. Additionally, the company could require further investments to remain competitive.
UBS anticipates that the ongoing strategic review may serve as a commercial distraction for PPG Industries. Consequently, the firm has revised its volume estimates for the years 2025 and 2026, reducing them by approximately 90 basis points and 30 basis points, respectively. There are also concerns about the risk of higher raw material costs in 2025, prompting a reduction in margin expectations.
The reassessment has led to a roughly 2% decrease in the projected earnings per share (EPS) for 2025 and 2026. Based on these projections, UBS foresees limited earnings upside for PPG Industries, with an estimated 1% increase and 1% decrease compared to the consensus EPS for 2025 and 2026. This revised outlook has resulted in the downgrade of PPG Industries' stock to a Neutral rating.
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