Analyst Note| Brian Bernard, CFA, CPA |
Shares of narrow-moat rated PPG slumped on July 20 after the firm reported second-quarter earnings that missed guidance and the FactSet consensus estimate. Adjusted EPS of $1.94 fell short of management's $2.15-$2.20 guidance and the $2.20 consensus estimate. PPG's earnings miss was primarily due to higher-than-expected raw material costs as well as supply chain issues for both the company and its customers. Raw material costs increased by a mid- to high-teens percentage year over year compared with management's expectations of high-single-digit inflation. Management also estimates that supply chain disruptions across the firm's end markets resulted in a $200 million revenue shortfall compared with earlier estimates of $70 million-$90 million. PPG has increased prices and cut costs to help offset these headwinds. Selling prices increased 3.5% during the second quarter, and we expect the firm will continue to take pricing actions during the rest of fiscal 2021. On the cost side of the equation, the firm saved $40 million during the quarter and raised its full-year cost-takeout target 10% to $135 million.