PPG Industries: Earnings Preview

| About: PPG Industries, (PPG)

PPG Industries Inc. (NYSE:PPG) is scheduled to report its fourth quarter and full-year 2011 results before the market opens on Thursday, January 19. The Zacks Consensus Estimate for the quarter is $1.28 per share, representing a year-over-year growth of 2.67%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 5.40%, with positive surprises in all the four quarters.

Previous Quarter Performance

PPG’s third-quarter earnings per share came in at $1.96, beating the Zacks Consensus Estimate by 3 cents and ahead of the year-ago earnings of $1.58 per share

The revenue in the quarter increased by 11% to $3.8 billion from the year-ago quarter of $3.5 billion, slightly ahead of the Zacks Consensus Estimate of $3.89 billion. The increase was attributable to improved demand, higher pricing in each of its coatings business, successful cost reduction initiatives and a gradual industrial recovery worldwide, partly offset by rising raw material costs.

Company’s Outlook

The company did not provide any guidance for earnings per share, but it expectsnormal seasonal fourth quarter patterns to occur. The company also anticipates further pricing gains in every segment. PPG continues to work on initiatives to deploy its cash to grow earnings.

The company also stated at its analyst day in December 2011 that its earnings per share will be down by 8 cents to 14 cents per share in the fourth quarter of 2011 due to floods in Thailand, which affected its optical products. However, PPG does not see this impacting 2012 so much and expects very little impact on earnings in that year

PPG remains optimistic for the year 2012 and announced at its analyst day that its growth will be based on innovation, cost and supply chain management, as well as continuing disciplined cash deployment.

Agreement of Estimate Revisions

In the past 30 days, 2 analysts made downward revisions for the fourth quarter and fiscal 2011, with no upward revisions.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimate dropped by 4 cents to $1.28 per share for the fourth quarter and by 3 cents to $6.78 per share for fiscal 2011.

Over the 90-day period, the Zacks Consensus Estimate plunged 19 cents for the fourth quarter and 12 cents for fiscal 2011.

Our Viewpoint

PPG’s Performance Coatings and Specialty products have demonstrated sound growth over the past few quarters and we expect this trend to continue in the fourth quarter of 2011. Better pricing is another indicator that the company will perform well.

PPG also has a strong cash position, and it intends to continue to utilize cash on earnings growth initiatives, and has also returned cash back to its shareholders in the form of uninterrupted dividend pay outs.

However, raw material costs have been a matter of concern for PPG’s earnings. Though the raw material costs have shown a moderating trend, the price of its primary raw material titanium dioxide (TiO2) has been escalating. We believe that PPG’s significant presence in the U.S. construction, European architectural and global auto, appliance and industrial coating markets exposes it to substantial headwinds.

In view of the above stated reasons, we maintain short-term (1 to 3 months) Hold rating and a long-term (6 months) Neutral recommendation.

PPG faces stiff competition from the DuPont Performance Coatings segment of EI DuPont de Nemours & Co. (NYSE:DD) and BASF Coatings AG.

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