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Sherwin-Williams Beats on Earnings in Q3

Zacks Equity Research

Sherwin-Williams Co.’s (SHW) third-quarter 2013 adjusted earnings of $2.68 per share beat the Zacks Consensus Estimate of $2.62. The results exclude one-time items including 13 cents per share charge resulting from a government import duty assessment related to the company’s Brazilian operations.

Including one time items, earnings came in at $2.55 per share, up roughly 14% from $2.24 per share a year ago. The improvement was driven by improved results of the Paint Stores, Consumer and Global Finishes Groups.

Revenues, Costs and Margins

Sherwin-Williams, which is among the leading paint companies along with PPG Industries Inc. (PPG) and Akzo Nobel NV (AKZOY), posted net sales of $2.85 billion in the quarter, a 9.4% year over year rise. It surpassed the Zacks Consensus Estimate of $2.78 billion.

The improvement was driven by positive impact of acquisitions and increased paint sales volume of Sherwin-Williams’ Paint Stores Group. Acquisitions contributed 1.1% to the increase in consolidated net sales in the quarter while currency swings had an unfavorable impact of 0.8%.

Cost of sales in the third quarter was $1.55 billion, up 6.8% year over year. Gross profit increased 12.6% year over year to $1.29 billion. Selling, general and administrative expenses went up 11.3% year over year to $890 million.

Performance by Segment

The Paint Stores Group posted net sales of $1.76 billion in the reported quarter, up 13.5% from the year-ago period. The improvement largely stemmed from the increase in architectural paint sales volume across all end market segments. Segment profit increased 19.6% to $359.4 million mainly due to higher paint sales volume, partially offset by increases in selling, general and administrative expenses.

Net sales of the Consumer Group unit increased 5.4% to $366.8 million due to timing of seasonal shipments to some customers. Segment profit increased 28% to $73.1 million in the quarter from $57.1 million in the year ago quarter, mainly due to higher volume sales and improved operating efficiencies. Acquisitions increased net sales of Consumer Group segment by 0.2% in the reported quarter.

Net sales from the Global Finishes Group segment went up 3.2% to $507.3 million in the quarter as a result of selling price increases and acquisitions. The segment’s profit jumped 22.3% to $44.5 million. The growth was fueled by increased selling price, improved operating efficiencies and good cost control.

The Latin America Coatings Group net sales remained flat at $208.6 million in the quarter  as selling price increases and higher paint sales volume was offset by unfavorable currency translation. Segment profit plunged 95.4% to $1 million in the quarter due to charges relating to the Brazil import duty assessment, partly offset by selling price increases and higher paint sales volume. The company recorded charges of $19.8 million related to import duty taxes paid to the Brazilian government.

Share Repurchase

Sherwin-Williams acquired 1.5 million shares through open market purchases in the reported quarter. The company had remaining authorization to purchase 13.65 million shares as of Sep 30, 2013.

Comex Acquisition

Sherwin-Williams has completed its takeover of the U.S. and Canadian businesses of Mexico’s leading paint company Consorcio Comex S.A. de C.V. for $90 million in cash and assumed liability of around $75 million. The acquisition is a strategic fit for Sherwin-Williams and will enable it to better serve its customers across some of its key markets.

Comex sells paints and coatings under a host of brands in the U.S. and Canada. Its operations across these markets consist of 234 and 80 company operated stores in the U.S. and Canada, respectively.

Sherwin-Williams, in Nov 2012, agreed to buy Comex for roughly $2.34 billion, including debt. While the company has closed the takeover of its U.S. and Canadian businesses, it remains committed to secure the green light from the Federal Competition Commission of Mexico to complete the acquisition of Comex’s core Mexican operations.  


For the fourth quarter, Sherwin-Williams expects consolidated sales to increase 5%-7% year over year. It expects earnings per share in the band of $1.29 to $1.39 for the quarter.

Sherwin-Williams anticipates that the Comex acquisition which was completed in Sep 2013 will increase net sales by $95 million to $105 million. However, the acquisition will have an unfavorable impact on net income per common share of nearly 20 cents to 40 cents per share in the fourth quarter.

For 2013, Sherwin-Williams anticipates that consolidated net sales would increase by a mid single-digit clip over 2012. It has reduced its earnings per share guidance for 2013 which is now expected in the range of $7.00 to $7.30 per share compared with the previous guidance of $7.45 to $7.55 per share.

Sherwin-Williams currently retains a Zacks Rank #2 (Buy).

Another company in the paints industry, RPM International Inc. (RPM), retains a Zacks Rank #2 (Buy).

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