Morningstar | PPG's String of Price Increases Finally Improves Operating Margins Despite Volume Weakness
PPG's first quarter was mixed, with the performance coating segment's operating margin increasing versus the prior-year period, though sales volume fell meaningfully. The margin expansion was largely as we expected. PPG's price increases have finally overtaken rising resin prices. Sales declines in both segments were slightly bigger than we were anticipating, largely due to economic weakness and a slowdown in automotive original-equipment manufacturer demand for coatings. Foreign exchange also weighed on sales, driving a 4% decline from last year. We've trimmed our sales forecast for 2019, leading us to reduce our fair value estimate to $98 per share from $99. Our narrow moat rating is unchanged.In the performance coating segment, architectural volume weakness was partially offset by robust aerospace, protective, and marine coating demand, which was up more than 10%. Following the loss of Lowe's as a customer, we expect architectural growth to remain muted until later this year. While residential construction has been tepid in recent months, we think rising household formation should support increasing volume over the next five years. Operating margins rose nearly 100 basis points versus the prior year to over 14%, which marks a turning point for profitability after a rough couple of years. As PPG continues to raise prices, we think there is room for additional margin expansion.
The industrial coating segment felt the slowdown in global automotive production. Management attributed most of the high-single-digit automotive volume decline to weaker Chinese demand. Weaker sales volume and unfavorable foreign currency movements drove a nearly 10% decline in segment operating income. Signs of improving conditions in China, such as the rebound of stock prices and property values, may translate to better results from the Chinese auto market as 2019 progresses. With time, we expect margins to recover similar to the performance coating results this quarter.
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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