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Sherwin-Williams Poised on Valspar Buyout, Input Costs a Woe

We issued an updated research report on paints and coatings giant, The Sherwin-Williams Company SHW on Dec 17.

Sherwin-Williams has underperformed the industry it belongs to over the past year. The company’s shares have moved down 8.6% over this period compared with the industry’s decline of 2.7%.


 

Sherwin-Williams, in October, narrowed its adjusted earnings per share guidance for 2018 to $19.05 to $19.20 factoring in incremental supply chain costs to support a new customer program that was recorded in the third quarter. The company also said that it expects mid-single digit percentage increase in net sales year over year for fourth-quarter 2018. For full-year 2018, Sherwin-Williams projects high teen percentage increase in net sales from 2017.

Sherwin-Williams’ productivity improvement initiatives, working capital reductions and supply chain optimization should yield margin benefits. Working capital management and efforts to cut operating costs are also helping the company to generate healthy cash flows.

Moreover, addition of Valspar-related sales should continue to support the company’s top line. The Valspar acquisition has enabled Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies.

Sherwin-Williams should gain from significant synergies of the acquisition. The company expects to achieve $320 million in annual run-rate synergies by the end of 2018, which is expected to contribute $140-$160 million to its bottom line.

However, Sherwin-Williams remains exposed to raw material cost pressure. The company saw higher-than-expected spike in raw material costs in the third quarter mostly due to higher crude oil and propylene pricing. Sherwin-Williams expects average inflation to be around 6% (or potentially higher) for full-year 2018. Nevertheless, Sherwin-Williams is taking appropriate pricing actions in the wake of raw material cost inflation.

The Sherwin-Williams Company Price and Consensus

 

The Sherwin-Williams Company Price and Consensus | The Sherwin-Williams Company Quote

Zacks Rank & Stocks to Consider

Sherwin-Williams is a Zacks Rank #3 (Hold) stock.

Better-ranked stocks worth considering in the basic materials space include The Mosaic Company MOS, Israel Chemicals Ltd. ICL and Cameco Corporation CCJ.

Mosaic has an expected earnings growth rate of 75.2% for the current year and carries a Zacks Rank #2 (Buy). The company’s shares have rallied 23% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Israel Chemicals has an expected earnings growth rate of 19.4% for the current year and carries a Zacks Rank #2. The company’s shares have rallied 35% over the past year.

Cameco has an expected earnings growth rate of 66.7% for the current year and carries a Zacks Rank #2. The company’s shares have gained 12% in the past year.

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