Shares of PPG (PPG) are sliding after the company guided third and fourth quarter earnings below consensus, citing higher raw material costs and softening demand. Meanwhile, its peer Axalta Coating (AXTA) is also under pressure following the announcement that CEO Terrence Hahn has resigned amid an investigation by an outside counsel into his conduct unrelated to financial matters, which the company believes was inconsistent with its policies.

PPG OUTLOOK: Last night, PPG said it sees third-quarter adjusted earnings per share between $1.41-$1.45 and revenue of $3.8B, both below consensus of $1.59 and $3.88B, respectively. In a statement, CEO Michael McGarry said that, “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. 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 $15M. 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.” For the fourth quarter, PPG said it sees adjusted EPS between $1.03-$1.13, with consensus at $1.35. “We are anticipating continued raw material cost inflation in the fourth quarter, but at a more modest year-over-year rate given the inflation spike that occurred in the fourth quarter 2017,” the CEO added. Commenting on the news, Deutsche Bank analyst David Begleiter told investors that while he had expected that the second half of 2018 would be challenging due to a combination of rising raw material costs, FX headwinds from stronger U.S. dollar and lower than expected auto OEM coatings demand, Q3 came in worse than expected. The analyst sees the announcement as disappointing, but reiterated a Buy rating on the shares as PPG is raising prices to offset rising raw material costs with price/cost parity likely to be achieved.