Chart of the Day: China Reopening May Boost PPG Industries Stock
PPG
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- Basic resources lead gains on pan-European Stoxx 600 index as China ends quarantine restrictions
- Demand for polyaspartic coatings is expected to increase in building and construction, automotive, and other industries
- Fitch Ratings downgrades PPG Industries’ ratings due to elevated EBITDA leverage
- Technical analysis suggests potential for a bullish reversal in PPG stock price with support from moving averages and rising channel formation
Basic resources led market gains on Wednesday, with the pan-European Stoxx 600 index up 0.5% by early afternoon as China eased its zero-COVID policy restrictions, resuming international travel.
According to a report by IndustryARC, the global market for polyaspartic coatings is expected to reach $421.3 million by 2026 after growing at a compound annual growth rate of 3.5% in that period.
The demand for these coatings is expected to increase in the building and construction, automotive, and other industries due to their ability to protect against corrosion and their various benefits, such as shorter drying times, greater film thickness for UV protection, low volatile organic compound levels, and environmentally friendly properties.
These coatings are based on aliphatic isocyanates and are known for their rapid curing capabilities and ability to be applied in shallow temperatures. The polyaspartic coatings market is expected to be driven by emerging applications in the landscape and transportation industries, as these coatings offer excellent corrosion resistance and dry quickly.
However, the market may be challenged by the availability of cheaper substitutes such as epoxy and polyurethane. The building and construction sector is the largest consumer of polyaspartic coatings, and PPG Industries (NYSE:PPG) is a top player in the polyaspartic coatings industry.
Fundamentals
Fitch has downgraded the ratings of PPG Industries, including its Long-Term Issuer Default Rating (LT IDR) and senior unsecured ratings, to ‘BBB+’ from ‘A-‘ due to elevated EBITDA leverage.
Fitch expects PPG’s EBITDA leverage to remain above 2.0x in the intermediate term, which is inconsistent with the ‘A-‘ LT IDR.
The downgrade reflects higher debt levels from acquisitions since the end of 2020 and margin pressure from input cost inflation and supply chain bottlenecks.
While Fitch expects modest improvement in margins in the next few years, slower economic growth and a lower demand environment could make it difficult for the company to increase margins and reduce leverage significantly. Meanwhile, the rating outlook is stable.
Technicals
The stock has been ranging since the February low, having actualized the head and shoulders top. The 50-week MA crossed early in the month below its 200 counterparts, triggering a Death Cross, suggesting the falling channel (red) resumption.
PPG Weekly Chart
However, if the price climbs above $138, it will have completed a bottom and broken the channel’s topside simultaneously.
While the medium-term channel is more potent than the short-term range, the long-term uptrend, represented by the uptrend line since the Feb. 2009 bottom, is even more powerful.
PPG Daily Chart
The daily chart shows that the moving averages have moved in the opposite direction, triggering a golden cross. Again, the weekly MAs are more impactful.
Furthermore, moving averages can’t be relied upon amid a sideways price move, as they are only worthwhile when they are ‘moving’.
Still, I will provide the following parameters for a bullish reversal, along with the rising channel (green) in the making.
Trading Strategies
Conservative traders might go long if the price closes above the channel, demonstrating accumulation either above the channel or the bottom.
Moderate traders may go long once the price breaks $140, proving support above the $138 neckline.
Aggressive traders can go long now, counting on the support of the MA’s confirming the bullish strongholds of the short-term rising channel and the Oct. 5 high.
Trade Sample — Aggressive Long
- Entry: $125
- Stop-Loss: $123
- Risk: $2
- Target: $135
- Reward: $10
- Risk-Reward: $1:5
