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Will Currency Drag PPG Industries' (PPG) Q3 Earnings?

Zacks Equity Research

PPG Industries PPG is set to release its third-quarter 2015 results ahead of the bell on Oct 15. Last quarter, the Pennsylvania-based coatings giant delivered a 3.09% positive earnings surprise on strength in its automotive businesses and synergies from acquisitions. But unfavorable currency translation dented its revenues that fell short of expectations.
 
PPG Industries has beaten the Zacks Consensus Estimate in the trailing 4 quarters with an average beat of 3.26%. Let’s see how things are shaping up for this announcement.
 
Factors to Consider
 
While PPG Industries is seeing strong momentum across automotive OEM, automotive refinish and aerospace markets, it is still exposed to significant currency headwinds.

Unfavorable currency impact reduced its sales by roughly $320 million and earnings by 11 cents per share in the second quarter of 2015 and is expected to remain a headwind in the September quarter. PPG Industries expects an unfavorable impact of $1 billion on its sales and $100 million on its pre-tax earnings for 2015.

PPG Industries also faces macroeconomic challenges, stemming from a sluggish global economy. Company is witnessing weak demand in some of its emerging markets including South America. While PPG is seeing improvements in Europe of late, it may continue to face softness in the region with weak economic activity in some parts and a still challenging demand environment. Some of its end-markets including commercial construction and heavy-duty equipment still remain somewhat sluggish.

Nevertheless, PPG should gain from its aggressive cost cutting and restructuring actions. Its restructuring actions (includes right-sizing headcount and production capacity) are expected to deliver pretax savings of $100 million to $105 million by 2017 with partial year savings of $15-$20 million is expected in 2015.

Earnings Whispers

Our proven model shows that PPG Industries is likely to miss earnings estimates this quarter. This is because the stock has a negative Earnings ESP (Expected Surprise Prediction) and a Zacks Rank #4 (Sell).
 
Negative Zacks ESP: The earnings ESP for PPG Industries is -1.86% – the difference between the Most Accurate estimate of $1.58 and the Zacks Consensus Estimate of $1.61. This indicates a likely negative surprise.

Zacks Rank #4 (Sell): PPG Industries’ Zacks Rank #4, when combined with a negative ESP, indicates an earnings miss. We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
 
Stocks That Warrant a Look
 
Here are some other companies in the chemicals space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Orion Engineered Carbons SA OEC has an earnings ESP of +14.29% and a Zacks Rank #3 (Hold).

Compass Minerals International Inc. CMP has an earnings ESP of +6.98% and a Zacks Rank #3.

LyondellBasell Industries N.V. LYB has an Earnings ESP of +2.77% and a Zacks Rank #3.

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PPG INDS INC (PPG): Free Stock Analysis Report
 
LYONDELLBASEL-A (LYB): Free Stock Analysis Report
 
COMPASS MINERLS (CMP): Free Stock Analysis Report
 
ORION ENGINRD (OEC): Free Stock Analysis Report
 
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