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Coatings makers post solid second-quarter earnings

4:53 PM MDT | July 21, 2014 | —Vincent Valk

Bunch: Automotive OEM growth strong again in the second quarter for PPG.

Coating makers PPG Industries and Sherwin-Williams (SW) both report solid second-quarter results, since earnings increased year-on-year (YOY) and beat estimates on rising sales and volumes.

PPG reports second-quarter net income from continuing operations up 24% YOY, to $393 million, or $2.80/share, on sales up 5%, to $4.1 billion. Adjusted earnings rose 24% YOY, to $2.83/share, ahead of analysts’ consensus estimate of $2.77/share, as reported by Thomson Reuters (New York).

“The benefits of our new business portfolio are measurable, as our adjusted earnings per share from continuing operations increased 24% this quarter, with an average quarterly increase the past six quarters of more than 30%,” says PPG chairman and CEO Charles Bunch. “In the quarter, we continued to deliver growth across most of our businesses in comparison with strengthening prior-year results. We realized the highest growth in automotive [original equipment manufacturing] and various general industrial and specialty coatings end-use markets, as we continue to benefit from solid end-use market demand supplemented by customer adoption of new PPG technologies.”

Europe’s earnings grew ahead of all regions because of the continent’s economic rebound, PPG says. Earnings grew likewise by double-digit percentages in the United States, Canada, and emerging markets, the company adds. PPG also announced the acquisition of Mexico’s Comex during the quarter, months after SW terminated plans to acquire Comex because of Mexican antitrust concerns.

SW says second-quarter net income is up 13.3% YOY, to $291.4 million, on sales up 12.2%, to $3.04 billion. Earnings totaled $2.94/share, slightly ahead of analysts’ consensus estimate of $2.93/share.

The company has also increased its full-year 2014 earnings guidance, to $8.50–8.70/share, up from $8.12–8.32/share. SW’s earnings totaled $7.26/share in 2013. Third-quarter 2014 earnings are expected to total $3.15–3.25/share, compared with earnings of $2.55/share in the third-quarter 2013.

PPG and SW were among the first chemical makers to report earnings, with most other companies expected to report starting the week of 21 July. Forecasts for the coming earnings season are mixed but optimistic­. Solid YOY improvements are mostly expected, but some companies, especially those with ag exposure, have tempered expectations.

Analysts say they expect overall chemical sector results to improve YOY in the second quarter, although earnings increases are expected to be smaller than originally anticipated. This year “got off to tougher-than-expected start, as harsh winter weather stifled demand, increased the cost of energy/raw materials, and disrupted operations. Many companies believed these were temporary setbacks and that lost sales would be recovered in the second quarter,” says Frank Mitsch, an analyst with Wells Fargo. However, the second quarter bounced back more weakly than expected because of continued outages and a major shift from corn to lower-margin soybean planting, Mitsch adds. The latter trend caused ag-heavy DuPont and FMC to cut their guidances, with analysts generally following suit.

Despite this, “our leading indicators for chemical sector pricing power and earnings [are] improving,” says Laurence Alexander, an analyst with Jefferies (New York). Wells Fargo expects a mix of earnings beats and misses but still expects sector earnings to rise 11% YOY, a larger increase than the overall S&P500, Mitsch says.

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