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What's in the Offing for PPG Industries' (PPG) Q2 Earnings?

Zacks Equity Research

PPG Industries Inc. PPG is set to release second-quarter 2019 results ahead of the bell on Jul 18. The paint giant is expected to gain from its cost cutting and restructuring initiatives, pricing actions and strategic acquisitions amid headwinds including raw materials cost inflation and unfavorable currency translation.

The company has outperformed the industry year to date. While PPG Industries’ shares gained around 14.5% over this period, the industry saw a decline of roughly 19.4%.


 

Let’s see how things are shaping up for this announcement.

What do the Estimates Say?

The Zacks Consensus Estimate for revenues for PPG Industries for the to-be-reported quarter stands at $4,094 million, reflecting an expected year-over-year decrease of 0.9%.

For the company’s Industrial Coatings unit, segment income is expected to increase 0.9% year over year as the Zacks Consensus Estimate is $225 million for the second quarter. The same for the Performance Coatings segment is pegged at $427 million, essentially flat on a year-over-year comparison basis.

Factors at Play

PPG Industries, in its first-quarter call, said that it expects second-quarter earnings in the range of $1.76-$1.86 per share, which includes unfavorable currency translation impacts similar to the first quarter.

The company faces headwinds from unfavorable currency translation. It witnessed currency headwinds in the first quarter due to the strengthening of the U.S. dollar. Currency swings reduced its sales by more than 4% or around $160 million in the quarter. The company expects unfavorable currency impact of $130-$150 million on sales and 5-7 cents per share on earnings in the second quarter.

PPG Industries also faces cost pressure associated with raw materials and logistics. The company witnessed persistent raw material cost inflation in the first quarter, marking the 10th straight quarter of year-over-year increase. The inflationary impacts are expected to continue in the June quarter. The company also faces headwinds from logistics cost inflation.

The company also expects to incur charges in the range of $185-$200 million (barring certain non-cash items) related to its restructuring actions in the second quarter.

PPG Industries is also exposed to challenges from sluggish global industrial activities. It expects subdued global economic activity in the second quarter. The company also envisions general industrial demand to be modest and uneven by end market and region in the quarter.

Nevertheless, the company is aggressively managing costs (including accelerating restructuring activities) and is also implementing appropriate pricing actions to counter the impact of cost inflation. The company is expected to benefit from these initiatives in the to-be-reported quarter.

PPG Industries is executing significant restructuring actions to improve cost structure. These actions delivered savings of more than $20 million during the first quarter. The company expects to achieve roughly $70 million in cost savings in 2019.

The company, in May 2019, also noted that it has identified certain opportunities to further improve the operating efficiency and also sustain commercial excellence. It is finalizing a new cost-savings program, which targets full-year run-rate savings of roughly $125 million once fully implemented. The company is expected to provide more details on this program in its second-quarter call.

PPG Industries is also undertaking steps to grow business inorganically. The company, earlier this year, completed the acquisitions of Whitford Worldwide and Hemmelrath. It expects that its three recently announced and completed buyouts will add around $400 million in annualized revenues.

PPG Industries, Inc. Price and EPS Surprise

 

PPG Industries, Inc. Price and EPS Surprise

PPG Industries, Inc. price-eps-surprise | PPG Industries, Inc. Quote

Earnings Whispers
 
Our proven model does not show that PPG Industries is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. This is not the case here as you will see below:
 
Earnings ESP:
Earnings ESP for PPG Industries is -2.24%. This is because the Most Accurate Estimate is currently pegged at $1.79 while the Zacks Consensus Estimate stands at $1.83. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks Rank: PPG Industries carries a Zacks Rank #3, which when combined with a negative ESP, makes surprise prediction difficult.  

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

Yamana Gold Inc. AUY has an Earnings ESP of +25% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arconic Inc. ARNC has an Earnings ESP of +2.04% and carries a Zacks Rank #1.

AK Steel Holding Corporation AKS has an Earnings ESP of +71.43% and carries a Zacks Rank #3.
 
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PPG Industries, Inc. (PPG) : Free Stock Analysis Report
 
Yamana Gold Inc. (AUY) : Free Stock Analysis Report
 
Arconic Inc. (ARNC) : Free Stock Analysis Report
 
AK Steel Holding Corporation (AKS) : Free Stock Analysis Report
 
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