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PPG Projects Higher Costs, Soft Demand to Hit Q3 Earnings

Zacks Equity Research

PPG Industries, Inc. PPG has released updates for third-quarter 2018 financial results. The company expects earnings per share (EPS) from continuing operations in the range of $1.47-$1.51 per share and adjusted EPS in the range of $1.41-$1.45 for the third quarter. Currently, the Zacks Consensus Estimate for third-quarter earnings is pegged at $1.59. The company projects net sales to be roughly $3.8 billion for third-quarter 2018, flat year over year.

Notably, the projected adjusted EPS is lower than $1.90 in the second quarter of 2018 and $1.52 in the third quarter of 2017. The company expects adjusted tax rate between 20% and 21% in the third quarter.

The company witnessed considerable elevating logistics and raw material cost inflation, which includes the effects of increasing oil and higher epoxy resin prices. Per PPG, the increased inflationary impacts witnessed during the quarter resulted in the highest level of cost inflation since the cycle that started two years ago. Moreover, overall demand in China softened during the third quarter. Also, the company experienced weaker automotive refinish sales because several European and U.S. customers have high inventory levels due to lower demand in the end-use market.

Per PPG, the impact from weak foreign currencies, mainly from emerging regions, led to a year-over-year decline of $15 million in income. The company stated that lower demand along with the currency effects impacted year-over-year earnings. It expects the trend to persist for the rest of 2018.

However, the company will continue to aggressively manage costs (including accelerating restructuring activities). Regarding the broader business trends, PPG expects growth in sales volume of roughly 2%, which excludes the negative impact from the customer assortment changes in the U.S. architectural coatings business. Additionally, it expects sequentially higher selling prices in the third quarter.

Notably, the company expects raw material cost inflation to linger in the fourth quarter but at a more modest year-over-year rate. This is because there was a considerable spike in inflation during the fourth quarter of 2017. Currently, it expects EPS for the fourth quarter in the range of $1.03-$1.13, including the wide range, primarily owing to finalization of full-year tax rate. The company is committed to earnings-accretive cash deployment. It expects to deploy roughly $1 billion on share repurchases or acquisitions during the fourth quarter.

The company’s shares have lost 2.5% in the past year compared with the industry’s decline of roughly 6.5%.


Zacks Rank & Stocks to Consider

PPG currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks worth considering in the basic materials space are KMG Chemicals, Inc. KMG, Celanese Corporation CE and Cabot Corporation CBT.

KMG Chemicals has an expected long-term earnings growth rate of 28.5% and sports a Zacks Rank #1 (Strong Buy). The company’s shares have rallied 23% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Celanese has an expected long-term earnings growth rate of 10% and carries a Zacks Rank #1. The company’s shares have moved up 4.6% in the past six months.

Cabot has an expected long-term earnings growth rate of 11% and carries a Zacks Rank #2 (Buy). The company’s shares have gained 16.4% in the past six months.

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