A Look At The Fair Value Of PPG Industries Inc (NYSE:PPG)

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Sebastian Eder

Updated Mon, Aug 20, 2018, 7:07 AM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of PPG Industries Inc (NYSE:PPG) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in August 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for PPG Industries

The model

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF ($, Millions)	$1.20k	$1.62k	$1.82k	$1.96k	$1.92k
Source	Analyst x8	Analyst x12	Analyst x7	Analyst x3	Analyst x1
Present Value Discounted @ 9.48%	$1.10k	$1.35k	$1.39k	$1.37k	$1.22k

Present Value of 5-year Cash Flow (PVCF)= US$6.42b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 9.5%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = US$1.92b × (1 + 2.9%) ÷ (9.5% – 2.9%) = US$30.29b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = US$30.29b ÷ ( 1 + 9.5%)⁵ = US$19.26b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$25.68b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $106.1. Compared to the current share price of $108.42, the stock is fair value, maybe slightly overvalued at the time of writing.

NYSE:PPG Intrinsic Value Export August 20th 18

The assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at PPG Industries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.5%, which is based on a levered beta of 0.926. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For PPG, there are three fundamental factors you should further research:

Financial Health: Does PPG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does PPG’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of PPG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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