PPG Earnings: Margins Benefit From Selling Price Gains but Industrial Demand Remains Tepid

Narrow-moat PPG PPG reported mixed second-quarter results, as continued volume pressure across its portfolio was met with strong price growth. Softening demand for architectural coatings globally along with a slower recovery in China weighed on volume, but favorable pricing provided a tailwind for margin growth. Despite challenges, management noted continued improvement in its supply chain and raw material availability, an encouraging development given the challenges both have posed in the last few years. We’ve increased our fair value estimate to $115 from $114 per share due to time value of money.

Second-quarter revenue increased almost 4% year over year as a decline in volume was more than offset by pricing gains. The performance coatings business posted strong results, with revenue increasing 4% year over year and segment operating margins up 250 basis points to an impressive 17.7%. A small decline in volume was more than offset by favorable pricing gains, largely from the first-quarter price increase earlier this year. Additionally, PPG’s Comex business continues to outperform, as it reported record sales for the 12th consecutive quarter amid robust demand in Mexico. In the industrial coatings group, a slowdown in industrial and packaging end markets was offset by strength in automotive original equipment manufacturers, or OEM, which continues to benefit from the global rebound in automotive production that should support the segment through the end of the year.

Management raised its full-year guidance amid strong margin growth in the second quarter, now expecting adjusted EPS of $7.38 (midpoint) from $7.10 (midpoint) previously. Management remains somewhat optimistic despite ongoing concerns of economic slowdowns in many of its operating regions. Nevertheless, given the current strength in PPG’s performance coatings business, we think its updated guidance is attainable even with potential demand headwinds in the U.S. and Europe in the second half of the year.