U.S. Markets close in 2 hrs 29 mins

A Hazy Outlook Hurts Sherwin-Williams

Dan Caplinger, The Motley Fool

A strong economy has bolstered U.S. stocks for a long time, but internationally, the macroeconomic picture is looking a lot cloudier. That's had an impact on global businesses like paint giant Sherwin-Williams (NYSE: SHW), which does a lot of its business overseas and relies on international sources for its supply chain and its distribution network. With the threat of slowdowns in key markets, many have feared that Sherwin-Williams would see a slowdown in its sales performance.

Coming into Thursday's fourth-quarter financial report, Sherwin-Williams investors had modest expectations for top-line growth but expected solid earnings results. The paint maker wasn't able to match those expectations, and its outlook for 2019 left a lot of questions unanswered about where Sherwin-Williams sees its best prospects for long-term growth.

Four cans of paint and some color swatches.

Image source: Sherwin-Williams.

Dealing with disappointment

Sherwin-Williams' fourth-quarter results fell short of what many had hoped to see. Sales climbed just 2% to $4.06 billion, and that was marginally below the $4.08 billion that most of those following the stock were expecting to see on the top line. After accounting for a number of extraordinary items, adjusted earnings came in at $3.54 per share, falling short of the consensus forecast among investors for $3.65 per share in profit.

Mixed performance among Sherwin-Williams' segments showed some of the weak spots for the company. Americas Group sales climbed 3%, as the company reported strong results in architectural paint sales and was able to boost its selling prices. However, same-store sales growth in the U.S. and Canada slowed to just 2.9%, just over half what Sherwin-Williams achieved in the previous quarter. Segment profit was marginally higher as rising raw material costs ate into stronger sales performance.

The consumer brands unit saw greater struggles, as net sales for the segment were down 6.5% from year-ago levels. Sherwin-Williams cited lower sales to many of its retail customers for the overall decline, but cost control efforts and price increases helped produce a $12 million segment profit versus break-even results in the fourth quarter of 2017.

Performance coatings gave Sherwin-Williams a nice boost. Sales were up 5% in the quarter, and segment profit soared by more than 60% due largely to the impact of the Valspar merger.

CEO John Morikis tried to keep a long view. "Sherwin-Williams delivered record results in 2018," Morikis said, "despite a fourth quarter that was below our expectations." He pointed to its ongoing focus on innovative products and services in an effort to satisfy its customer base as a key component of its success over the past year, and efforts to use Sherwin-Williams' pricing power to offset higher raw material costs were largely effective.

What's ahead for Sherwin-Williams?

Moreover, the company has high hopes for 2019. As Morikis explained: "We enter 2019 well positioned and focused on what we can control. While the current macroeconomic outlook is less than clear, we see significant opportunities for profitable growth throughout the business." Those efforts will include improving its retail stores, building partnerships with outside retailers, and making the most of the resources it acquired from Valspar to grow its business.

Where Sherwin-Williams left people nervous was in its guidance for 2019. The company said that it expects sales to rise 2% to 6% during the first quarter, which is pretty consistent with the consensus estimate among investors for 4% top-line growth. Full-year growth expectations of 4% to 7% on the top line were also encouraging in relation to what those following the stock have expected. But earnings projections of $16.77 to $17.77 per share were far below what Sherwin-Williams shareholders were looking to see, and even adding back $3.63 per share in acquisition-related costs and other expenses, the adjusted figure came in below the roughly $21.50-per-share consensus forecast.

Sherwin-Williams investors weren't entirely happy about the results, but the stock's moves were fairly muted, falling between 1% and 2% in pre-market trading following the announcement. Sherwin-Williams has the ability to salvage a better 2019, but it'll need to demonstrate an ability to outperform the fairly low bar that it set for itself to begin the year.

More From The Motley Fool

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.