PPG Industries, Inc. (PPG) has dipped below $100 per share for the first time since February 2017 after lowering its guidance significantly based upon inflationary pressures and weaker demand in China.
Shares of the Pittsburgh-based paint and coating materials company are down close to 10% in premarket trading.
The pain might not subside swiftly, analysts are warning.
"We would expect the stock to push lower on the announcement and struggle to outperform until the business can demonstrate an ability to catch up to the inflationary pressures," BMO Capital Markets analyst Joseph McNulty wrote in a note on Monday night.
He issued a "market perform" rating and advised investors to wait until the company can prove its ability to overcome inflationary obstacles.
Surprising The Street
The drop in PPG shares last night that has bled into Tuesday morning reflects the surprise for investors, given the company's pronouncements the morning before its abysmal guidance revision.
The company noted that it would increase prices on OEM coatings in order to diminish the impact of "cost pressures in raw materials, freight, distribution and labor, across every region."
PPG finished Columbus Day in the green as the market was comforted by the explanation and the expectation that guidance was safe and sound.
Not to be.
Instead, the company said it now expects third-quarter adjusted EPS to be in the $1.41 -$1.45 range, versus a $1.59 estimate, and issued a fourth-quarter forecast of $1.03 to $1.13 in contrast with analysts' $1.32 estimate. The company blamed weakened demand in China and higher inventories among U.S. and North American customers, which was exacerbated by the aforementioned logistics costs and inflationary pressure.
"In the third quarter, we continued to experience significant raw material and elevating logistics cost inflation, including the effects from higher epoxy resin and increasing oil prices," PPG CEO Michael McGarry explained. "These inflationary impacts increased during the quarter and, as a result, we experienced the highest level of cost inflation since the cycle began two years ago."
Jim Cramer said that experts have been "really bushwhacked" by the news given the morning's press release and added it will have implications for the broader industrial sector given the factors at blame.
"Any company with any auto exposure or oil exposure, as well as dollar and logistics issues, now will be considered guilty until proven innocent," he said. "That's what this PPG number will do."
PPG will be hosting an earnings presentation on Oct. 18 at 2:00 p.m. ET. Investors in both PPG and the broader industrial sector will eagerly await the company's explanation on its forlorn forecast.
For now, analysts are trimming expectations for the foreseeable future.
"While the third quarter was expected to be soft, the combination of adverse foreign exchange, slightly more severe demand headwinds and stubbornly high raw materials proved even worse than we expected," Jefferies Financial analyst Laurence Alexander wrote in his assessment on Monday night. "With restructuring efforts already underway, we expect the incremental headwinds to spill over to 2019."
Given the longer-term pressures, he cut his price target to just $103 per share from $110 and issued a "hold" rating.