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Mark Vickery

Earnings Preview: PPG Industries

PPG DD

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Specialty coatings and paints giant PPG Industries (PPG - Analyst Report) is slated to report its third-quarter 2012 results before the trading begins on Thursday, October 18. The current Zacks Consensus Estimates for revenues and earnings for the quarter are $3,904 million and $2.21 per share, respectively.

The Pennsylvania-based company, in its second quarter earnings call, sated that it expects the European market to remain under pressure in the second half of 2012. The company expects higher input costs to continue to weigh on its results. But it has adopted appropriate pricing strategy to offset the impact.

With respect to earnings surprises, PPG Industries beat the Zacks Consensus Estimates in three of the trailing four quarters while it reported in line in one occasion. The company has delivered an average positive earnings surprise of 1.4% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Second Quarter Flashback

PPG Industries racked up record earnings in second-quarter 2012 despite lower sales. It logged adjusted earnings of $2.36 a share, matching the Zacks Consensus Estimate.

Revenues, however, fell 0.8% year over year to $3,955 million, missing the Zacks Consensus Estimate of $4,153 million. Unfavorable currency exchange translation weighed on the top line in the quarter.

PPG Industries saw mixed results across its end markets in the quarter with its aerospace and automotive OEM coatings businesses recording healthy growth. Strong internal growth in domestic market was somewhat offset by weakness in Europe.

Estimate Revisions Trend

Agreement


Estimate for the September quarter has barely moved over the past week with just 1 analyst (out of 16) having lowered his/her forecast without any reverse movement. There were two upward revisions over the past 30 days accompanied by a couple of movements in the opposite direction. A similar trend applies to the estimate for 2012.

Magnitude

Given the lack of activity, the Zacks Consensus Estimate for the third quarter remained static (at $2.21 a share) over the past week and month. Estimate for 2012 has increased by a penny over the last 30 days while remaining stationary over the last 7 days. The current Zacks Consensus Estimate for fiscal 2012 is $7.94, representing an estimated year-over-year growth of 16.9%.  
 
Our Take

PPG Industries has a diversified business, both in terms of products and geographical presence. We expect better pricing to support the company’s results in the third quarter.

Moreover, PPG Industries has a strong cash position, and continues to utilize cash on earnings growth initiatives. The company has been returning cash to its shareholders in the form of uninterrupted dividend payouts. Its restructuring measures, especially in its European operation, are also expected to fetch cost savings in the third and fourth quarters this year.

However, raw material costs have been a matter of concern. Although raw material costs have shown a moderating trend, the price of the company’s primary raw material TiO2 has been escalating. The company expects raw material inflation to continue to weigh on its results in the September and December quarters. Moreover, it may continue to face lower volume across many of its end markets in Europe in the third quarter.

PPG Industries, 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. We have a long-term Neutral recommendation on the stock.

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