We are reaffirming our Neutral recommendation on leading paints maker The Sherwin-Williams Company (SHW). First-quarter 2012 earnings of 95 cents a share beat the Zacks Consensus Estimate by a penny.
Net sales jumped roughly 15% year over year to $2.14 billion on the back of higher paint sales volume and pricing, beating the Zacks Consensus Estimate. Revenues from the core Paint Stores Group division soared roughly 21% in the quarter, benefiting from better pricing. However, the company saw a decline in gross margin due to raw material inflation.
Sherwin-Williams elevated its earnings outlook for fiscal 2012 based on improving demand for its products. The company now expects earnings in the range of $5.75 to $6.05 per share for the year, up from the previous expectation of $5.37 to $5.67.
Ohio-based Sherwin-Williams is among the leading manufacturers of paints, coatings and related products. The company’s philosophy is to diversify its customer base and expand its operations into various geographies.
The company continues to invest in its Paint Stores Group segment to boost market share. We believe that an improvement in market demand in the near term will place Sherwin-Williams in a better position. Further, the company is also well placed to expand its footprint by meaningful acquisitions.
Sherwin-Williams is also implementing effective pricing strategies to offset higher raw materials costs, especially for titanium dioxide (a key paint pigment). Price increases contributed more than half of the revenue growth in the first quarter. The company expects incremental benefit from pricing in the second quarter, which may lead to a sequential improvement in the gross margin.
However, Sherwin-Williams faces tough competition from companies like Akzo Nobel N.V. and PPG Industries Inc. (PPG). Moreover, raw material costs remain a headwind. Softness across the housing and construction markets is also impacting the company.
Sherwin-Williams currently retains a Zacks #1 Rank, which translates into a short-term “Strong Buy” rating.
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