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Keep Holding Sherwin-Williams

Zacks Equity Research

On Feb 4, we reaffirmed our Neutral recommendation on paint giant Sherwin-Williams (SHW). While we are encouraged by continued strength in the company’s paint business and its commitment to boost shareholder returns, we maintain a balanced stance considering currency headwinds, volatility in raw material costs and dilutive impact of acquisition.

Pros and Cons of SHW

Sherwin-Williams, a Zacks Rank #3 (Hold) stock, saw its profit zoom roughly 71% year over year in fourth-quarter 2013, reported on Jan 30, on gains across its Paint Stores Group and Consumer Group divisions. However, adjusted earnings missed the Zacks Consensus Estimate. Revenues rose by double-digit clip year over year on higher paint sales volume and contributions from acquisitions and beat expectations.

Sherwin-Williams, which is among the major paint makers 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. The company returned over 90% of its net operating cash flow to its shareholders in 2013 through dividends and share repurchases.

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. Sherwin-Williams is also optimistic about completing the acquisition of Comex’s core Mexican operations.

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 also continues to contend with raw material cost pressure, primarily for propylene and titanium dioxide (a key paint pigment). 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 first quarter. The company sees an unfavorable currency impact of 45 cents to 55 cents per share associated with the buyout on its earnings for full-year 2014.

Other Stocks to Consider

Other paint stocks sporting favorable Zacks Rank are RPM International Inc. (RPM) and PPG Industries Inc. (PPG) with both holding 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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