PPG Earnings: Selling Price Gains Drive Growth Despite Economic Uncertainty

Narrow-moat PPG PPG reported first-quarter results that were largely in line with our expectations. While demand across its end markets remains mixed, the company continues to push through price increases, with selling prices rising 8% year over year. Price growth continues to drive the story for PPG as overall demand tempers, leading to a roughly 3% decline in volume year over year. Moreover, management noted a slowdown in raw material cost increases and additional improvements in availability. This is a welcome change for PPG, and we think it will provide an opportunity for margin expansion through the year. We’ve increased our fair value estimate to $114 from $112 per share due to time value of money.

First-quarter revenue was up roughly 2% year over year, largely due to higher selling prices that offset a small decline in volumes. The performance coatings segment reported a 2% increase in revenue, mainly driven by continued strength in PPG Comex and wins in its U.S. architectural business. That said, U.S. and European architectural coatings markets remain pressured as inflation and geopolitical issues weigh on consumer confidence. Revenue in the industrial coatings segment was roughly flat year over year, but selling price growth and moderating raw material costs drove robust segment operating margin expansion (560 basis points). We maintain our view that automotive OEM and the reopening in China will drive growth for PPG’s industrial segment during the year, while moderating inflation should benefit margins across both segments.

Management’s second-quarter guidance anticipates net sales volume to increase or decrease a low-single-digit percentage and raw material costs to moderate. While its volume guidance spread seems wide, it’s clear that uncertainty around coating demand in Europe and China remains. Despite attractive growth in automotive and architectural and tailwinds from the reopening in China, PPG faces a challenging 2023 as economic uncertainty persists.