The Reversal In PPG Industries Comes Into Question
Price action in PPG Industries (NYSE: PPG) corrected in the first quarter of 2022 and put in a bottom just before the release of Q1 results. The bottom bore the hallmarks of reversal but that scenario has come into question. The Q1 results were better than expected and included some indications supply chain issues were receding but guidance was tepid. We don’t see this stock entering a deeper correction but we do see a chance for price action to trend sideways at the current levels for the next few months to two quarters, up to and until we know for sure the global economy is on the mend.
The analysts have been downgrading the stock and their price targets since the first of the year and that trend continued in the wake of the Q1 report. At least 2 analysts including Deutsche Bank and Robert W. Baird lowered their price targets and we see that trend continuing. The consensus of the two is $167.50, almost $5 below the broader $172 Pricetargets.com consensus, and the consensus is trending lower in the 3-month and 1-month comparison.
The silver lining is the consensus is still 30% above the price action and may help hold price action up over the next few months but we are expecting some volatility. The institutions hold about 80% of the stock and their activity has been vigorous. The balance of activity over the past year is more or less flattish but in the last three quarters selling outpaced buying. This activity may persist in the current quarter due to rotation and profit-taking. Short-interest is very light at less than 1.0% so that isn’t a concern at this time.
PPG Industries Beats On Pricing Increases
PPG Industries has a good quarter and one in which volume exceeded expectations but there are two things bothering us. The first is that volumes were better than expected but still down on a YOY basis, the second is that revenue growth is entirely due to price increases offset by a decline in volume. Because the company is planning to raise prices again this year, this quarter, we see a chance for volume to take another hit. Regardless, the $4.31 billion in net revenue is up 11.1% from last year and beat the consensus by 165 basis points. On an organic basis, revenue is up 7% and aided by acquisitions. On a segment basis, Performance Coatings increased by 11% on an 8% increase in prices and a 2% decline in volume while Industrial Coating also increased by 11% on a 12% increase in price and 5% decline in volume.
Moving down to the margin, net income fell 95% on a YOY basis on the combined impact of inflation and Russia. The Russian write-off is a non-cash impairment that left the GAAP earnings at $0.08 while adjusted EPS was much better. Even so, the adjusted $1.37 may have beaten by $0.26 but it is still down by 27% from last year despite price hikes. The company says that materials costs are up 25% from last year and that more price hikes are coming to fight the high cost of oil.
The Technical Outlook: PPG Industries Struggles With Resistance
Price action in PPG Industries corrected in the first quarter of the year and fell below key support at the $135 level. This level is consistent with the pre-COVID highs and is now acting as resistance. If the market can not get above this level soon there is a danger not only of range-bound trading but of a deeper decline as well. A break below the $120 level could trigger a massive outflow of capital and drive price action back to the $100 level.
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