Morningstar | PPG's 3Q Earnings Warning Sends Shares Lower; Maintaining $103 FVE
After the Oct. 8 market close, PPG provided an earnings warning for its third quarter, calling out significant raw material cost inflation and somewhat weaker-than-expected demand in certain segments. The company expects adjusted earnings per share of $1.41-$1.45 for the quarter, or about 6%-9% below Street consensus before the announcement. Although this suggests a longer path to margin recovery, we had already expected a gradual period of margin recovery for PPG. We've left our $103 fair value estimate and narrow moat rating in place. Despite today's substantial market pullback for PPG, the shares trade roughly in line with our fair value estimate and do not strike us as an attractive buying opportunity.In our eyes, margin weakness is consistent with the last quarter's 10% rise in oil prices. PPG's products usually are sold based on fixed prices, not pass-through contracts. While this is great during times of material cost deflation, it can hurt when costs are rising. Given that coatings are typically a very small share of the total cost in most applications, we believe PPG will be able to gradually phase in price increases to offset near-term weakness. In addition, our longer-term outlook for lower petroleum prices should allow the company to recapture lost earnings in the long term.
PPG Industries manufactures and distributes a range of paints, coatings and specialty materials. The company's business is comprised of two reportable business segments: Performance Coatings, which primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, as well as transparencies and transparent armor; and Industrial Coatings, which primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas and other specialty materials.
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