PPG Industries (NYSE:PPG) had a great quarter in the fiscal third quarter of the year. PPG Industries also had a terrible quarter in the third quarter of the year and one that raises serious questions about the US economy. If what we're reading is right, and we've seen evidence of this in other earnings reports, then negative feedback loops are building within the economy that are strengthening the headwinds for all businesses.
Specifically speaking about PPG Industries, the company is an input cost for retail consumers through construction, business, and industry and has already raised prices by 6% over last year. The company is planning to raise prices again which means consumers of its products are facing another input cost increase themselves. Worse, supply chain disruptions for PPG mean PPG's customers can't do their work which ultimately means PPG’s own efforts are being hindered (when it can’t freight, equipment, or supplies). It's a mind-bending cycle and one that we see ending very badly for the S&P 500.
“As we communicated in early September, supply-chain disruptions worsened during the quarter as various commodity and component shortages restricted both our manufacturing output and that of certain customers. While overall demand remained robust during the quarter, these increased disruptions prevented us from completely fulfilling our strong order books. Throughout the quarter, we continued to prioritize selling price increases and we delivered 6 percent price realization for the quarter, led by the Industrial Coatings reporting segment.”
Systemic Challenges Cut Deeply Into PPG's Bottom Line
PPG had a fantastic quarter on the top line. The company reported $4.37 in consolidated revenue which is good for a gain of 18.8% over last year and a company record. Revenue also beat the Marketbeat.com consensus by 280 basis points but could have been better if not for systemic challenges. Notably, organic growth was aided by a 600 basis point tailwind from pricing increases so the results are better looking than reality in terms of volume. On a segment basis, Performance Coatings are up 23% on a 1% downtick in volume while Industrial Coatings are up 13% on a 4% decline in volume.
The worst news is in regards to the margins. The company saw a 413 basis point contraction in operating income that resulted in a 22% decrease in net income. Margins were impacted by a 25% increase in raw materials as well as rising freight costs and labor costs. On the bottom line, the GAAP earnings of $1.43 not only missed the consensus by $0.03 cents but fell 23% versus last year. Adjusting for reinvestment and expansion plans, the adjusted earnings of $1.69 beat the consensus by $0.10 but are still down -12% despite the 18.8% increase in revenue. This is not good news.
The guidance is equally sour. The company is expecting revenue to fall -8% to -10% versus last year with EPS coming in a range of $6.67 to $6.73. This compares to the consensus estimate for $7.05 and comes in the face of strongly rising backlogs. PPG should be accelerating revenue and leveraging earnings, not dealing with the systemic headwinds that are challenging the globe today.
The Technical Outlook: Shares of PPG May Move Higher Anyway
The price action in PPG Industries has been bullish over the past week or two with price action hitting a bottom, moving above the short-term moving average, and forming a near-term consolidation pattern. Based on the technicals, price action may continue higher despite the earnings challenges because of the companies capital return plans and growth strategy. The company is planning to repurchase shares in the fourth quarter, it pays a safely growing 1.5% dividend yield, and the balance sheet is a strong foundation for its plans to acquire bolt-on businesses. Price action may be a little volatile in the near term but we would expect to see support near the short-term moving average eventually drive price action up to the $170 level.
PPG Industries Company Profile
PPG Industries, Inc engages in the manufacture and distribution of coatings, specialty materials, and glass products. It operates through Performance Coatings and Industrial Coatings segments. The Performance Coatings segment comprises of the refinish, aerospace, protective and marine, and architectural coatings businesses.