EUR 850.00 For Business Accounts Only

Morningstar | Although PPG's Pricing Efforts Are Gaining Traction, Margins Have a Long Way To Go; Lowering FVE. See Updated Analyst Note from 17 Jan 2019

Coatings companies had a challenging 2018, chasing higher costs with price increases over the last year. PPG was no exception. Operating income fell by 7.3% from the prior year, on a 1% sales decline largely driven by a stronger dollar. Although PPG is successfully passing on price increases, they've come at a slower pace than costs inflation, which is pressuring margins. While we maintain the view that PPG will make up ground on pricing as cost pressures ease, we've trimmed our margin expectations over the next two years to account for a slower pace of price increases. Accordingly, we've lowered our fair value to $99 per share from $103. Our narrow moat rating is unchanged.

In PPG's performance coatings segment, fourth quarter sales rose 1% on relatively strong architectural and aerospace sales, offset by weakness in DIY sales. The business was able to raise prices 3% during the quarter, which should boost operating margins going into 2019. During the fourth quarter, margins were flat year on year, which ended the recent history of margin compression for the segment. We expect operating margins to increase more than 1% going into 2019 as pricing overcomes input cost inflation. Volume growth should also resume in the coming quarters as the company moves past its transition out of Lowe's, following Sherwin's exclusivity arrangement with the chain.

Although the rate of margin compression has slowed in PPG's industrial coatings segment, they continued to compress versus the prior year. However, we think margins will expand slightly higher going into 2019 as PPG gains traction on pricing and oil-based input prices stabilize. In addition to continued cost inflation, volumes declined roughly 2% in the quarter as weakness in the Asia Pacific region was enough to offset modest growth in Europe and the Americas. To better account for the increasing costs, we've moderated our expectations for how quickly PPG can recover margins in the mid-to-high teens.