PPG Earnings: Pricing Power Drives Margin Expansion Despite Tepid Industrial Demand

Narrow-moat PPG PPG reported solid third-quarter results that were largely in line with our expectations. PPG is navigating a challenging operating environment where higher interest rates weigh on architectural paint demand and global industrial production remains soft in most regions. That said, PPG’s price increases and strength in smaller markets like automotive original equipment manufacturer, or OEM, and aerospace have helped offset these challenges. Management noted raw material availability and supply chain conditions continued to improve and have moderated to historical levels, which we think should provide some margin relief going into next year. We’ve increased our fair value estimate to $117 from $115 per share due to time value of money.

The performance coatings segment continued to perform well as net sales rose almost 7% year over year due to the realization of previously announced selling price increases despite flat volumes. Persistent softness in the North American do-it-yourself market as well as weak demand for architectural coatings in EMEA weighed heavily on volumes in the quarter. Once again, PPG’s Comex business in Mexico capitalized on strong demand in the region and saw record sales for the 13th straight quarter. We continue to be impressed by the performance in PPG’s Comex business and we expect it will buoy the segment through the rest of the year.

The industrial coatings group continued to benefit from strength in automotive OEM markets as global auto production rebounds, but softness in global industrial production hampered the segment during the quarter. Despite current macroeconomic headwinds, management raised its adjusted EPS guidance to $7.61 (midpoint) from $7.38 (midpoint) previously. While we expect tepid demand in North American DIY and European architectural coatings through the end of the year, strength in automotive OEM coatings and PPG’s Comex business should provide an avenue for the company to achieve its revised guidance.