Friday, October 22, 2010

Wall Street to Manufacturers: Not Bad, but What About Next Quarter?

Coatings companies appear to be joining in the upbeat earnings parade that has driven the recent bull market on Wall Street.

Some stock-market watchers, however, are not sold on the idea that the outlook will remain so bullish.

The party crashers of the moment include a trio of Credit Suisse analysts, who opined in Barron’s.com that “negative headwinds” for U.S. architectural-coatings companies lurk in the form of the latest foreclosure mess and raw-material cost and supply issues.

The analysts—John P. McNulty, Alina Khaykin and Abhiram Rajendran—said the foreclosure moratoriums announced by major mortgage lenders could cause “further fear/confusion in the housing markets” and result in new woes for existing-home sales.

The analysts also cited the upstream squeeze on titanium dioxide (TiO2), which is “impacting the coating space’s raw-material supply and pricing.”

McNulty, Khaykin and Rajendran shared their views in the Barron’s forum “Soapbox” (see Negative headwinds).

The analysts said the companies “in our coverage universe with the most U.S. existing home-sale exposure” include RPM International Inc. (rated at “underperform”), Valspar (rated at “neutral”) and PPG Industries Inc. (rated at “neutral”), along with Sherwin-Williams (“not covered”).

Regarding the raw-material situation, the analysts said pricing and supply issues “appear to be settling down in the acrylics market” after pressuring the industry in the first half of the year. But they said “outages and a tight market for TiO2 may result in continued-margin pressures for the industry.” They noted that Cristal Global’s (Saudi Arabia) Ashtabula Plant 2, with about 7% of U.S. capacity, went down earlier this month, with the company declaring force majeure (greater force) on supplies.

Meanwhile, another opinion reported in the financial media expresses a more bullish view on at least one of the companies cited in Barron’s Soapbox—PPG.

“Morgan Stanley analysts continue to believe that PPG Industries has the best end-market exposure and the best geographic exposure of the coatings companies,” reported the SmarTrend newsletter (see SmarTrend on PPG).

SmarTrend cited the views of Morgan Stanley analysts Paul Mann and Charles Dan, who forecast PPG would turn in solid results for the third quarter thanks to demand for industrial and performance coatings. They also said demand from for architectural coatings “likely remained subdued.”

Sure enough, PPG on Thursday reported strong sales gains and record-high earnings for the quarter (see PPG Reports on third quarter).

Asked if the company had any comment on the Barron’s Soapbox entry from the Credit Suisse analysts, a PPG representative simply referred Durability + Design to the company’s financial results announced Thursday.
 
Also reporting strong sales and earnings for the third quarter last week was AkzoNobel (see AkzoNobel posts gains).

Representatives of RPM and Valspar did not respond immediately to an inquiry from this bureau about the “Soapbox” entry on Barron’s.com.

But what are they supposed to say, anyway…”Our sales and profits were very good, but you’re right, Wall Street—they’re not good enough?”

Wait a minute…who was it that got all that TARP bailout help awhile back?

Analyze that, Wall Street!