PPG Industries’ Q2 2018 adjusted EPS
PPG Industries (PPG) announced its Q2 2018 earnings before the market opened on July 19. It reported adjusted EPS of $1.90, an increase of 5.6% over Q2 2017 on a continuing operations basis. It beat analysts’ estimate of $1.88. Adjusted EPS excluded gains from the sale of its Mexican Plaka wallboard business, the benefit from its legacy legal settlement, and transaction-related costs.
Its adjusted EPS was primarily driven by higher revenue growth, share repurchases, lower taxes, and a decrease in SG&A (selling, general, and administrative) expenses as a percentage of revenue. During the quarter, PPG bought back $460 million worth of shares to bring down the number of outstanding shares to 246.4 million. In Q2 2017, the number of outstanding shares was 259 million.
PPG also benefitted from lower taxes. In the second quarter, its adjusted effective tax rate was 22% compared to 24.3% in Q2 2017. It reported SG&A expenses of $945 million, representing 22.9% of its revenue, compared to 23% in Q2 2017. That implies a gain of 10 basis points year-over-year.
However, the increase in raw material prices resulted in an increase in COGS (cost of goods sold). It reported COGS of $2.38 billion in Q2 2018, representing 57.6% of its revenue, compared to 54.8% in Q2 2017. That implies an increase of 280 basis points year-over-year. PPG said the trend is likely to continue in the upcoming quarter. That put more pressure on its net income margin, indicating that PPG was unable to efficiently pass on the increase in raw material prices to its customers.
Stock price reaction
PPG stock declined a marginal 0.3% and closed at $106.39 on July 19. Although its Q2 2018 earnings managed to beat analysts’ estimate, the continued increase in raw material prices resulted in a contraction of its margins. The trend is expected to continue, which could be a reason to worry.
The Materials Select Sector SPDR ETF (XLB) has invested 4.6% of its portfolio in PPG Industries.