PPG net drops on lower volumes

First-quarter net income was $34 million, or 20 cents a share, compared with $ 56 million, or 33 cents a share a year ago.The results included one-time, restructuring charges of $55 million, or 33 cents a share, and impairment of trademarks of $9 million under an accounting change.Excluding those one-time charges, PPG posted net income of $98 million, or 58 cents a share, which beat the Thomson Financial/First Call average analyst estimate of 52 cents.

That was "because of cost-cutting, not because of revenues," Morgan Stanley analyst Leslie Ravitz said.

First-quarter net sales were $1.88 billion, $100 million short of Ravitz' expectation of $1.98 billion. It was also lower than analysts' estimate of $1.97 billion and year-ago net sales of $2.01 billion.

In its press release Thursday, PPG said coating segment sales were down 5% year-over-year because of volume declines in automotive original equipment and refinish, as well as industrial and aerospace segments. In addition, the company's glass segment saw a 12% decline in volume and 3% decline in pricing, while chemical segment sales dropped on sharply lower commodity pricing.

Despite the revenue shortfall, margins were better than expected, Ravitz said, due to "lower energy costs and good internal cost controls."

In addition, he noted that a $10 million insurance recovery wasn't included in one-time items because of accounting rules. Without that $10 million benefit, the company's earnings per share would have been 54 cents a share, not 58 cents, and a lot closer to his estimate of 53 cents, Ravitz said.

PPG's results don't reflect a strong economy, since volumes were down 3% compared with a year ago, he added.

Indeed, Chief Financial Officer William Hernandez said in a prerecorded statement Thursday that the overwhelming number of reports on the economy have been encouraging, but the company will feel better when it sees that data filtering through to its businesses.

"While we see signs that we are at the bottom of this economic cycle, we have not seen the upturn broadly reflected in our business as yet. Thus we continue to plan for slow recovery in our key markets," Hernandez said.

Argus Research analyst David Kerans said PPG's comments about the economy are significant because of its ties to various sectors of the economy, including automotive and construction.

"I would rate PPG to be one of the most relevant companies as a forward indicator (of the industrial economy)," he said.

PPG shares recently traded down $2.25, or 4%, to $52.65.

Kerans said the stock drop means investors were "not taking analysts' estimates at face value" and already expected some upside on earnings.

Ravtiz said the share drop had nothing to do with first-quarter results, "All chemical stocks are down today," he said.

Buckingham Research analyst John Roberts related the drop to company comments on the economy.

"I think the stock is reacting to the commentary they provided in that they really haven't seen any broad-based economic improvement in their business yet," he said.

The first-quarter upside in earnings was "related to cost-saving and restructuring," as well as "good weather and the strong housing and automotive production," he said.

In a Thursday note, Salomon Smith Barney analyst P.J. Juvekar said there is " limited upside" for the share price based on his 2003 est imate and the "recent runup in the stock." His 2003 earnings-per-share view is $3.56.