On Nov 27, we issued an updated research report on paint giant Sherwin-Williams SHW.
Sherwin-Williams’ earnings for third-quarter 2015 topped the Zacks Consensus Estimate but sales missed expectations. Revenues rose narrowly year over year as higher paints sales volumes were offset by currency headwinds. Profit from the company’s Paint Stores Group unit climbed 17.5% year over year in the quarter on the back of higher volumes. The company raised its earnings guidance for 2015.
Sherwin-Williams follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management and innovation. It is gaining from continued strength in its paint business, strategic investments and acquisitions. Sherwin-Williams should benefit from an upswing in the U.S. residential construction market which should drive demand for architectural paints.
Sherwin-Williams also continues to invest in its Paint Stores Group segment to boost market share. The company added 45 net new locations in Paint Stores Group in the first nine months of 2015 and remains on track to add 100 to 110 stores in this division this year. The company is also seeing healthy momentum for its HGTV HOME paints at Lowe’s personal stores.
The acquisition of the U.S. and Canadian businesses of Consorcio Comex S.A. de C.V. has also ushered in significant opportunity for Sherwin-Williams. The buyout has enabled it to better serve its customers across some of its key markets. The company should gain from the integration of the acquired Comex operations moving ahead.
Moreover, Sherwin-Williams’ aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement are expected to continue to yield margin benefits. Sherwin-Williams also remains committed to deliver incremental returns to shareholders leveraging healthy cash flows. The company’s board, last month, authorized it to buyback an additional 10 million shares of its common stock for treasury.
However, Sherwin-Williams’ Latin American operations remain exposed to soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar). Currency translation reduced sales from its Latin American operations by roughly 24% in the third quarter.
Currency swings also had an unfavorable impact of around 8% on sales from the company’s Global Finishes Group unit in the quarter. Sherwin-Williams is expected to continue to face currency headwind and soft demand in its Latin American markets in the near term.
Sherwin-Williams is also faced with volatility in raw material costs. Moreover, a material recovery is not expected in the commercial construction market in the near term.
Sherwin-Williams is a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other companies in the basic materials space worth considering include Celanese Corporation CE, Innospec Inc. IOSP and The Dow Chemical Company DOW. While Celanese and Innospec hold a Zacks Rank #1 (Strong Buy), Dow retains a Zacks Rank #2 (Buy).
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