Earlier this morning, coatings and pigment company Ferro (FOE 15.88, -0.68, -4.11%) lowered its FY18 EPS and Adjusted EBITDA guidance to $1.45-$1.50 from its prior outlook of $1.55-$1.60, and to $257-$262 mln from $270-$275 mln, respectively.
In its press release,
FOE pointed to macroeconomic uncertainties with some particular softness in its
architectural coatings and automotive markets. It is also notable that FOE's
downside guidance comes on the heels of Sherwin-Williams (SHW) lowering its Q4
guidance on Tuesday, and after Floor & Decor (FND) commented at an analyst
event that the housing market is "a bit mixed versus what it's been and
that could put some challenges on hard surface line."
While each of these companies aren't perfectly comparable, they do compete in some of the same markets. Therefore, we do believe there are some inferences that can be made regarding the health of some key components of the global economy -- namely, the building, housing, renovation, and automotive markets.
FOE's operating segments include Performance Coatings (metal and ceramic), Performance Colors and Glass, and Color Solutions. The end markets it serves include Building and Renovation (33% of FY17 revenue), Industrial (20%), Electronics (12%), Automotive (12%), and Household (4%). These markets are highly fragmented due to there not being only one dominant player. Since FOE has a wide variety of products, no single competitor directly matches it. From a geographic perspective, Europe is its largest market at 35% of revenue, followed by Asia Pacific at 21%, and North America at 19%.
Circling back to its guidance, FOE highlighted architectural coatings, automotive markets, higher de-stocking of its tile products, and softness in Europe as the primary factors in its lowered outlook. Architectural coatings include paints used to coat buildings and homes, which lines up with SHW's reduced guidance. In its press release, SHW said that sales for its Consumer Brands and Performance Groups fell short of expectations, which also happen to include architectural paints and coatings, and industrial coatings for the automotive industry. So, between FOE and SHW both citing these same headwinds, we can safely infer that conditions have indeed softened in the housing and auto industries.
Furthermore, the fact that FOE singled out its tile products as an area of weakness is also telling because it follows FND's cautious statements from a couple days ago. This adds to the concerns that renovation and remodeling activity is also sluggish. As interest rates have climbed higher, it has become more expensive to take out a mortgage and more expensive to take out a line of credit -- which many people do to finance remodeling projects.
Meanwhile, in the auto industry, sales in China continue to sink, down 14% last November, the largest decline of 2018. In fact, sales have declined in China for four months in a row. The last time that happened was in 1998-1999 during the Asian financial crisis. The economy there was already decelerating, but the new tariffs and ongoing trade tensions have escalated matters. As for Europe, FOE is not the first company to recently cite weakness on the continent. On that note, a couple days ago, Delta Airlines (DAL) partially blamed its soft first quarter guidance on weakness in Europe, saying it was responsible for a 1% point headwind in its outlook.
To conclude, FOE is the third company this week with significant exposure to the housing, renovation, and automotive markets to cut its guidance. The slowing economy in China is well-documented, but headwinds stemming from Europe may become more of a theme in this earnings season as well. In sum, while conditions certainly have not dramatically eroded, there is plenty of evidence indicating that key sectors within the economy have softened.