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Neutral on Sherwin-Williams

Zacks Equity Research

We are retaining our Neutral recommendation on leading paints maker The Sherwin-Williams Company (SHW) following its mixed third-quarter 2012 results. Adjusted earnings (excluding unfavorable currency impact) of $2.29 a share beat the Zacks Consensus Estimate of $2.19.

Net sales rose roughly 5% year over year to $2.6 billion on the back of higher paint sales volume and pricing, but missed the Zacks Consensus Estimate of $2.67 billion. Revenues from the core Paint Stores Group division soared roughly 10% in the quarter, benefiting from better pricing and increased volume.

Sherwin-Williams raised its earnings outlook for fiscal 2012 and now expect earnings in the range of $6.35-$6.55 per share for the year, up from the previous expectation of $6.20 to $6.40.

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.

Sherwin-Williams follows a strategy of growing through acquisitions and internal initiatives such as efficient working capital management and innovation. The company continues to invest in its Paint Stores Group segment to boost market share. Sherwin-Williams is also implementing effective pricing strategies to offset higher raw materials costs.

However, Sherwin-Williams continue to contend with raw material costs inflation. Higher raw material costs impacted every reporting segment in the third quarter. Moreover, the company faces significant challenge in the remainder of 2012 given the weakening market conditions in Europe and Latin America.

Sherwin-Williams also remains exposed to currency headwinds. We are also concerned about the weakness in the commercial construction market.

Sherwin-Williams, which competes with E. I. du Pont de Nemours and Company (DD) and PPG Industries Inc. (PPG), retains a short-term Zacks #2 Rank (Buy).

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