Sherwin-Williams (SHW) Q2 Earnings: Another Beat in Store?
The Sherwin-Williams Company SHW is set to release second-quarter 2018 results ahead of the bell on Jul 24.
In the last quarter, the paints and coatings giant posted adjusted earnings of $3.57 per share, which beat the Zacks Consensus Estimate of $3.14, translating into a positive earnings surprise of 13.7%.
Sherwin-Williams raked in record first-quarter revenues of $3,965 million, up roughly 44% year over year, driven by the addition of Valspar sales, higher selling prices and increased paint sales volumes in the Americas Group unit. Revenues, however, fell short of the Zacks Consensus Estimate of $3,984 million.
Sherwin-Williams beat the Zacks Consensus Estimate in two of the trailing four quarters, while missed twice, delivering an average positive surprise of around 1.8%.
Shares of Sherwin-Williams have moved up 18.4% over a year, outperforming the industry’s 15% growth.
Let’s see how things are shaping up for this announcement.
Earnings Whispers
Our proven model shows that Sherwin-Williams is likely to beat on earnings estimates this quarter. This is because it has the right combination of two key ingredients, a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Zacks ESP: Earnings ESP for Sherwin-Williams is currently pegged at +0.23%. This is because the Most Accurate estimate stands at $5.60 while the Zacks Consensus Estimate is pegged at $5.59. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Sherwin-Williams currently carries a Zacks Rank #3. The combination of a favorable Zacks Rank and a positive ESP makes us reasonably confident of an earnings beat.
Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Factors at Play
Sherwin-Williams, during its first-quarter 2018 call, said that it sees mid-to-high single digit percentage increase in net sales year over year for second-quarter 2018. It also sees incremental sales from Valspar acquisition to be around $600 million for April and May in the quarter.
For full-year 2018, Sherwin-Williams projects mid-to-high single digit percentage increase in net sales from 2017. It also sees incremental sales from the Valspar buyout to be roughly $1.7 billion for the first five months of the year.
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. Sherwin-Williams expects to achieve $320 million in annual run-rate synergies by the end of 2018, which is expected to provide a benefit of $140-$160 million to its bottom line.
The Zacks Consensus Estimate for consolidated net sales for Sherwin-Williams for the second quarter is $4,712 million, reflecting an expected year-over-year increase of around 26.1%.
Net sales from the Americas Group segment for the second quarter is projected to increase roughly 26% from the first quarter as the Zacks Consensus Estimate for the second quarter is currently pegged at $2,620 million.
Net sales from the Consumer Brands Group segment for the second quarter is projected to increase roughly 21% sequentially as the Zacks Consensus Estimate for the second quarter is currently pegged at $797 million.
For the Performance Coatings Group segment, net sales for the second quarter is projected to go up roughly 6% from the first quarter as the Zacks Consensus Estimate for the second quarter is currently pegged at $1,300 million.
Sherwin-Williams’ cost control initiatives, working capital reductions, supply chain optimization and productivity improvement 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 in the to-be-reported quarter.
However, Sherwin-Williams remains exposed to raw material cost pressure. The company has witnessed a spike in raw material costs in the first quarter, mostly affecting its Performance Coatings unit. It sees higher year over year input costs in first-half 2018 and projects average inflation to be in the 4% to 6% band. However, the company is taking appropriate pricing actions in the wake of a spike in input costs.
Sherwin-Williams also faces earnings headwinds from sizable charges related to Valspar acquisition. The company expects charges related to the Valspar acquisition to be $3.40-$3.50 per share for 2018.
The company, in April, also lowered its earnings per share guidance for 2018 to the range of $14.95 to $15.45 per share from its earlier view of $15.35 to $15.85 per share factoring in a 40 cents per share net reduction associated with an expanded customer agreement, mostly affecting the Valspar business.
The Sherwin-Williams Company Price and EPS Surprise
The Sherwin-Williams Company Price and EPS Surprise | The Sherwin-Williams Company Quote
Stocks to Consider
Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:
Ingevity Corporation NGVT has an Earnings ESP of +9.14% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celanese Corporation CE has an Earnings ESP of +3.13% and sports a Zacks Rank #2.
Eastman Chemical Company EMN has an Earnings ESP of +0.91% and carries a Zacks Rank #2.
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Eastman Chemical Company (EMN) : Free Stock Analysis Report
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