Early earnings mixed, but expectations mostly solid

23:48 PM | January 20, 2014 | —Vincent Valk

Bunch: Modest global growth expected in 2014.

Early earnings reports were mixed, as PPG Industries beat estimates on higher volumes in architectural and industrial coatings and H.B. Fuller fell short of expectations as gross margins declined. Both companies, however, are counting on solid growth in 2014 as economic expansions pick up in North America and China and Europe turns toward recovery. Analysts, meanwhile, expect fourth-quarter earnings to be mostly in-line with expectations and accelerating growth in 2014.

PPG reports fourth-quarter 2013 net income from continuing operations up 33% year-on-year (YOY), to $254 million, or $1.78/share, on sales up 14%, to $3.7 billion. Adjusted earnings, which excluded $4 million in acquisition-related costs, total $1.81/share, ahead of analysts’ consensus estimate of $1.73/share, as reported by Thomson Reuters (New York).

Earnings growth was a result of “our continuing operating and cost discipline... now being coupled with a higher level of organic sales growth,” says PPG chairman and CEO Charles Bunch. “We continued to outpace industry growth in aerospace and automotive OEM coatings. More broadly, we also benefited from stabilizing regional demand in Europe, as our year-over-year coatings volumes in that region were flat in the fourth quarter following nine consecutive quarters of decline.”

Bunch says that overall volumes grew 2% in the fourth quarter, the highest growth rate of the year. Volume trends in North America and emerging regions were similar with previous quarters. The company is optimistic about industrial activity prospects in early 2014. “Global growth in general industrial activity is expected to continue, including solid North American growth, ongoing growth in emerging regions, and higher European demand,” Bunch says.

In 2014, PPG expects “to realize benefits from modest global growth,” Bunch says. “Regionally, we expect growth to remain broadest in the US economy, spanning several coatings end-use markets. Emerging regions’ growth, while still uneven, is expected to continue at a solid pace for PPG, comparable to recent trends. In Europe, which represents about one-third of our sales, economies appear to be improving but remain fragile. In 2014, we anticipate measured growth in that region, and we expect to realize solid earnings leverage due to the actions we have taken the past two years to significantly reduce our regional cost structure.” The company also expects to spend $3–4 billion on growth initiatives and returning cash to shareholders in the next two years, Bunch adds.

H.B. Fuller reports fiscal fourth-quarter 2013 earnings down 12% YOY, to $22 million, or 43 cts/share, on revenues up 4%, to $533.5 million. Excluding special charges, mostly related to integrating former Forbo businesses, adjusted earnings totaled 68 cts/share, up 6% YOY but short of analysts’ consensus estimate of 75 cts/share. Earnings fell largely because of a decline in gross margins, the company says. Fuller’s fiscal fourth-quarter ended on 30 November 2013.

Fuller expects fiscal 2014 adjusted earnings to total $3.00–3.15/share, up 16–22% YOY from 2013 levels. The company remains on track to complete an information technology integration with the former Forbo business that it says will cost $60 million through 2016 but will lead to longer-term savings, it says. The integration of Forbo’s industrial adhesives business, which has been a drag on earnings, will be complete by this summer, Fuller adds.

Overall, fourth-quarter earnings “should be broadly in line with consensus. Key themes will likely include adverse weather in the US, a preemptive restock cycle in propylene derivatives, caution on incremental margins, new rounds of buybacks and cost cutting, optimism on China into the second-half, and a favorable turn in EU trends,” says Laurence Alexander, an analyst with Jefferies (New York). Few companies have preannounced earnings, Alexander notes.

Earnings per share grew 6% YOY across the chemicals sector in 2013, with growth expected to accelerate in 2014, according to Alexander. Volumes should rise through 2014, and the level of stock buybacks should also increase, he adds.