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Balanced View on Sherwin-Williams

Zacks Equity Research

On Oct 28, we reaffirmed our Neutral recommendation on paint giant Sherwin-Williams (SHW). While we are encouraged by sustained healthy momentum in the company’s paint business, we maintain a cautious stance factoring in currency headwinds and volatility in raw material pricing.

Why Held?

Both revenues and adjusted earnings for third-quarter 2013, reported on Oct 25, beat Zacks Consensus Estimates. Revenues rose roughly 9% year over year on higher paint sales volumes and contributions from acquisitions. The company, however, reduced its earnings outlook for 2013.  

Sherwin-Williams, which is among the major paint companies along with Akzo Nobel NV (AKZOY), follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management and innovation. Its philosophy is to diversify its customer base and expand its operations into various geographies.

Sherwin-Williams continues to invest in its Paint Stores Group segment to boost market share. It is also implementing effective pricing strategies to offset higher raw material costs. Sherwin-Williams also remains committed to deliver incremental returns to shareholders.

Moreover, the acquisition of the U.S. and Canadian businesses of Consorcio Comex S.A. de C.V. has ushered in significant opportunity for Sherwin-Williams. The acquisition is a strategic fit for the company and will enable it to better serve its customers across some of its key markets.

However, Sherwin-Williams remains exposed to currency headwinds. The company’s Latin American operations are facing soft end-market demand and unfavorable currency translation impact.

Sherwin-Williams is also exposed to raw material costs pressure. Moreover, we do not expect a material near-term recovery in the non-residential construction market.

In addition, integration costs associated with the takeover of Comex’s U.S. and Canadian businesses are expected to dilute Sherwin-Williams’ earnings in the fourth quarter. Factoring in that impact, the company has cut its earnings forecast for 2013.

Other Stocks to Consider

Other paint companies with favorable Zacks Rank are RPM International Inc. (RPM) and PPG Industries Inc. (PPG) with both retaining a Zacks Rank #2 (Buy).

Read the Full Research Report on SHW
Read the Full Research Report on PPG
Read the Full Research Report on RPM
Read the Full Research Report on AKZOY

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