PPG Industries Pulls Back To Support After Mixed Results
PPG Industries (NYSE: PPG) gives credence to fears that are sweeping through the market today. The company's revenue growth is supported by strong economic activity and that is good but earnings are being hurt by rising inflation and that is bad. The way things look, that situation is not going to change but PPG’s profitability will. The company has already implemented some price increases and is planning on implementing more to offset the cost pressures that caused it to miss earnings consensus during this reporting cycle. The real question that investors want to be answered, however, is whether or not systemic shortages in logistics and raw materials will be resolved sooner or later.
“Pervasive raw material supply disruptions drove year-over-year cost inflation of a mid-to-high-teen percentage … selling prices increased 3.5%; additional pricing actions being implemented …”
PPG's Great Quarter Was Not Great Enough
PPG Industries had a strong quarter to be sure but one that was marred by systemic issues within the economic recovery. The company's business was impacted by supply disruptions and raw materials shortages that deeply cut into revenue. So, while the $4.36 billion in revenue beat the consensus by 90 basis points it's not all that impressive. In addition, FX and acquisitions added 6% and 11% to that growth so the underline core revenue growth is much less than it appears. On a two-year basis, revenue is up 8.5% suggesting core Business is still well below the pre-pandemic levels. That's not good when the market was expecting much better than expected results.
“Our strong organic sales growth reflects a partial demand recovery from the pandemic, including above-market contributions across many of our businesses. However, our volume growth was significantly tempered due to various supply and component disruptions, including those that reduced the overall manufacturing capability of our customers. In addition, despite strong underlying end-use market demand, various coatings raw material shortages and logistics issues reduced our ability to fully supply our existing order book within the quarter.” said Michael H. McGarry, PPG chairman, and chief executive officer.
Moving down the report the great results are equally tepid when compared to the consensus expectations. The adjusted EPS of $1.94 Is nearly double what the company posted last year and up 5% on a 2-year basis but missed the consensus by a quarter dollar. The miss was due to “continual increases in raw material and transportation costs throughout the quarter” that the company is working to mitigate. Execs expect to see price increases offset inflationary pressures by the end of the fiscal year which is good for the bottom line but bad for the consumer.
PPG Industries Offers Weak Guidance
PPG Industries also updated its guidance for the year and gave the market something else to fret about. The company is expecting aggregate net sales to be up 21% to 23% with organic sales up by low single-digit percentages but at rates below the consensus estimates. In addition, the EPS estimate of $7.40 to $7.60 is well below the consensus of $7.97, and that Target may be hard to reach if inflationary pressures continue to mount.
The Technical Outlook: PPG Falls To Support, Don't Buy Yet
Shares of PPG Industries are down more than 6.5% in early trading and may have hit bottom but it is much too early to bet on that. Based on the deep decline, outlook for earnings, and technical indicators we think this stock may continue to fall. If support does not hold up at $155 this stock could fall all the way down to the $135 level.
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