Nightmare Scenario For Q3 Earnings Strikes Again After Trinseo Warning On Costs, China; Stock Implodes

Wednesday, October 10, 2018
By Paul Martin

by Tyler Durden
Wed, 10/10/2018

On Monday, in “PPG’s Horror Quarter Reveals The Nightmare Scenario For Q3 Earnings” we noted that in his preview of Q3 earnings season, Goldman’s chief equity strategist David Kostin said that whereas company earnings will most likely be stellar for yet another quarter, with 3Q EPS for the S&P500 growing by 21% Y/Y, what investors should focus on is company guidance about Q4 and the longer term especially as pertains to profit margins, with Goldman laying out three key risk factors: 1) tariffs, 2) wage inflation, and 3) interest rates.

Just 24 hours later, on Monday afternoon Pittsburgh-based coatings giant PPG provided a case study in just how prescient Kostin’s warning was by not only reporting a kitchen sink quarter, citing every concern investors have about the macro environment, but also cutting its earnings forecast for the third and fourth quarters of this year. The company weakness was widespread, and touched on all three aspects highlighted by Kostin.

“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 said in a press release on Monday after the close.

“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. Also, during the quarter, we saw overall demand in China soften, and we experienced weaker automotive refinish sales as several of our U.S. and European customers are carrying high inventory levels due to lower end-use market demand.”

“Finally, the impact from weakening foreign currencies, primarily in emerging regions, has resulted in a year-over-year decrease in income of about $15 million. This lower demand, coupled with the currency effects, was impactful to our year-over-year earnings and is expected to continue for the balance of the year.”

In other words between rising costs, slowing Chinese demand, higher inventories, and a strong dollar eating away at foreign sales, and suddenly what was the bedrock of US corporate stability is looking extremely shaky.

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