Earnings Preview: PPG Industries

Specialty coatings and paints giant PPG Industries ( PPG - Analyst Report ) is scheduled to report its second-quarter 2012 results before the trading begins on Thursday, July 19. The current Zacks Consensus Estimates for revenues and earnings for the quarter are $4,162 million and $2.37 per share, respectively.

PPG Industries expects domestic growth in the second quarter to be similar to the first quarter and expects accelerated growth in the emerging markets, buoyed by increased industrial activity in China. However, it continues to see sluggish demand in the European markets.

With respect to earnings surprises, PPG Industries beat the Zacks Consensus Estimates in the trailing four quarters and we expect this trend to continue into the second quarter. The company has delivered an average positive earnings surprise of 2.3% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

First Quarter Flashback

PPG Industries continued its positive surprise streak in first-quarter 2012 with adjusted earnings of $1.81 a share beating the Zacks Consensus Estimate by a couple of cents. Revenues rose 6% year over year to $3,752 million, also beating the Zacks Consensus Estimate of $3,696 million.

PPG Industries saw growth in each of its coatings businesses in the quarter. The company’s results were aided by strong domestic demand and growth across emerging markets, offset by weakness in Europe.

Estimate Revisions Trend

Agreement

Estimates for the June quarter saw limited movement over the past week with just 1 analyst (out of 14) having raised his/her forecast without any reverse movement. Estimates have leaned towards the negative side over the past 30 days with 3 analysts having lowered their forecasts with one moving in the opposite direction.

For 2012, estimates reflect a bearish sentiment with 4 analysts (out of 16) having pruned their estimates over the last 30 days with no upward movement. Over the past 7 days, 1 analyst has lowered his/her forecast with none raising the same.

Magnitude

The consensus estimate for the second quarter remained static over the past month while increasing by a penny over the past week. For 2012, the consensus estimate declined by 1 cent over the last 30 days while remaining stationary over the last 7 days. The current Zacks Consensus Estimate for fiscal 2012 is $7.97, representing an estimated year-over-year growth of 17.3%.

Our View

PPG Industries’ Performance Coatings and Specialty products businesses have delivered healthy growth over the past few quarters and we expect this trend to continue in the second quarter. Better pricing and lower costs of natural gas are also expected to support results.

PPG Industries has a strong cash position, and continues to utilize cash on earnings growth initiatives. Moreover, the company has been returning cash to its shareholders in the form of uninterrupted dividend payouts. It has also initiated restructuring measures, especially in its European operation, which is expected to fetch cost savings in the back half of 2012.

PPG Industries’ strategy of diversifying its business across various products and geographies has come in handy in testing times. However, raw material costs have been a matter of concern for the company’s earnings. Although raw material costs have shown a moderating trend, the price of the company’s primary raw material TiO2 has been escalating.

Currently, we have a long-term Outperform recommendation on PPG Industries. The company, which competes with EI DuPont de Nemours & Co. ( DD - Analyst Report ) , retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.