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PPG Industries (PPG): Can Q2 Earnings Pull a Surprise?

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PPG Industries Inc. (PPG - Free Report) is set to release its second-quarter 2016 results before the market opens on Jul 21.

In the last quarter, the company delivered a positive earnings surprise of 0.77%. The company saw higher profits in the quarter, aided by its cost-management initiatives and contributions from acquisitions. PPG Industries has surpassed the Zacks Consensus Estimate in two of the trailing four quarters with an average beat of 0.97%. 

Let’s see how things are shaping up for this announcement.

What Lies Ahead? 

PPG Industries is taking steps to grow its business inorganically by making a number of acquisitions. The company should continue to benefit from synergies of acquisitions (including Comex). Management anticipates annual cost synergies from the Comex acquisition to exceed its originally stated target of $45−$50 million by end-2016. The past acquisitions also helped the company lift margins and are expected to continue doing so, going forward. Further, PPG is focused on improving organic growth rates via product innovation and branding strategies while reducing costs.

The company expects the overall volume demand to grow in Europe and EMEA. Regional demand in EMEA remains below the pre-recession level and is expected to improve. Management expects strong income leverage on any incremental sales volume growth.

PPG remains committed to spending $2−$2.5 billion cash over 2015−2016 on acquisitions and share repurchases combined. It is on track with this objective and has a strong worldwide pipeline of acquisition options from end-user markets.

However, we note that PPG’s earnings are heavily exposed to unfavorable currency fluctuations. The company is expected to face an unfavorable currency impact of between $200 million and $260 million on its sales and $30−$40 million on pre-tax earnings in full-year 2016. These figures are much lower than those expected in Jan 2016, reflecting the strengthening of several currencies against the U.S. dollar. Instability in the foreign exchange market can lead to drastic deviation in this figure. 

The company’s cost of raw materials also fluctuates significantly due to changes in oil and energy prices. Last year, it did not benefit from the falling global oil price as the cost benefits are realized a few quarters after the price movement. The company is expected to reap these benefits in the first half of 2016.

PPG INDS INC Price and EPS Surprise

PPG INDS INC Price and EPS Surprise | PPG INDS INC Quote

 

Earnings Whispers

Our proven model does not conclusively show that PPG Industries is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP for PPG Industries is -0.54%. This is because the Most Accurate Estimate is $1.83, while the Zacks Consensus Estimate is pegged at $1.84. 

Zacks Rank: PPG Industries carries a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

 Stocks to Consider

Here are some companies in the basic materials space you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter: 

Huntsman Corporation (HUN - Free Report) has an Earnings ESP of +7.84% and a Zacks Rank #1.

Kronos Worldwide Inc. (KRO - Free Report) has an Earnings ESP of +100% and a Zacks Rank #3.

FMC Corp (FMC - Free Report) has an Earnings ESP of +4.48% and a Zacks Rank #2.

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