Sherwin-Williams Co.’s (SHW) second-quarter 2013 adjusted earnings of $2.56 per share missed the Zacks Consensus Estimate of $2.58 but exceeded the prior-year quarter’s earnings of $2.17 per share.
The results exclude 8 cents per share charge resulting from a government import duty assessment related to the company’s Brazilian operations and 2 cents per share related to unfavorable currency translation. Including these one time items, earnings came in at $2.46 per share.
The company’s shares fell as much as 11% in early trading, reflecting the miss.
Operational Update
Sherwin-Williams, which is among the leading coatings companies along with PPG Industries Inc. (PPG) and Akzo Nobel NV (AKZOY), posted net sales of $2.71 billion in the quarter, a 5.5% year over year rise. It, however, missed the Zacks Consensus Estimate of $2.78 billion.
The improvement was driven by a positive impact of acquisitions, increased sales volume and strong operating results of Sherwin-Williams’ Paint Stores Group. Acquisitions contributed 0.7% to the increase in consolidated net sales in the quarter.
Cost of sales in the second quarter was $1.48 billion, up 4.1% year over year. Gross profit increased 7.2% year over year to $1.23 billion. Selling, general and administrative expenses went up 3.3% year over year to $837 million.
Performance by Segment
The Paint Stores Group posted net sales of $1.61 billion in the reported quarter, up 8% from the year-ago period. The improvement largely stemmed from the increase in architectural paint sales volume across all market segments. Segment profit increased 24.7% to $66 million due to higher paint sales volume.
Net sales of the Consumer Group unit decreased 1% to $393.7 million due to lower sales volumes and the elimination of a portion of a paint program with a large number of retail customers. Segment profit declined 2.2% to $79 million in the quarter from $80.8 million in the year ago quarter, primarily due to lower sales volume.
Net sales from the Global Finishes Group segment went up 3% to $513.5 million in the quarter as a result of selling price increases and acquisitions. The segment’s profit jumped 13.5% to $54.5 million. The growth was fueled by increased selling price, and improved operating efficiencies, partly offset by unfavorable currency translation rate changes.
The Latin America Coatings Group sales increased 6.3% to $199 million in the quarter due to selling price increases and higher paint sales volume, partly offset by unfavorable currency translation. Segment profit plunged 90.3% to $0.9 million in the quarter due to charges relating to the Brazil import duty assessment. The company recorded charges of $11.8 million related to cost of goods sold due to the Brazil import duty assessment.
Share Repurchase
Sherwin-Williams acquired 0.8 million shares through open market purchases in the reported quarter. The company had remaining authorization to purchase 15.15 million shares as of Jun 30, 2013.
Outlook
For the third quarter, Sherwin-Williams expects consolidated sales to increase 6%-9% year over year. It expects earnings per share in the band of $2.55 to $2.65 for the quarter.
For 2013, Sherwin-Williams anticipates that consolidated net sales would increase by a mid single-digit clip over 2012. It reiterated its earnings per share guidance for 2013 which is expected in the range of $7.45 to $7.55.
Comex Acquisition
The Federal Competition Commission of Mexico informed Sherwin-Williams that by a 3-2 vote its previously-announced acquisition of Consorcio Comex, S.A. de C.V. was not authorized by the Commission. The company is reviewing the Commission's decision and expects to respond to the latter’s concerns in the near future. Sherwin-Williams, in Nov 2012, agreed to buy Mexico’s leading paint company Comex for roughly $2.34 billion including debt.
Our View
Sherwin-Williams continues to invest in its core Paint Stores Group to boost market share. The company follows a strategy to diversify its customer base and expand its operations into various geographies which will reduce its dependency upon prevailing market conditions.
Sherwin-Williams is maintaining its strategy of growing through acquisitions and also through internal initiatives, such as efficient working capital management and innovation. Moreover, the acquisition of Comex should usher in significant opportunities. However, soaring raw material prices remains a concern for the company. It also remains exposed to currency headwinds.
Sherwin-Williams currently retains a short-term Zacks Rank #3 (Hold).
Another company in the paints industry, The Valspar Corporation (VAL), retains a Zacks Rank #2 (Buy).
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