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Sherwin-Williams (SHW) Q3 Earnings: Is a Beat in the Cards?

Anindya Barman
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Sherwin-Williams (SHW) Q3 Earnings: Is a Beat in the Cards?

Valspar acquisition coupled with strategic actions are likely to boost Sherwin-Williams' (SHW) Q3 earnings.

The Sherwin-Williams Company SHW is set to release third-quarter 2018 results ahead of the bell on Oct 25.

In the last quarter, the paints and coatings giant posted adjusted earnings of $5.73 per share, which beat the Zacks Consensus Estimate of $5.59, translating into a positive earnings surprise of 2.5%.

Sherwin-Williams raked in record second-quarter revenues of $4,773.8 million, up roughly 28% year over year, driven by the addition of Valspar sales, higher selling prices and increased paint sales volumes in the Americas Group unit. Revenues, also beat the Zacks Consensus Estimate of $4,712 million.

Sherwin-Williams beat the Zacks Consensus Estimate in three of the trailing four quarters, while missed once, delivering an average positive surprise of around 2.5%.

Shares of Sherwin-Williams have moved up 4.3% over a year, underperforming the industry’s 6% 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).

Earnings ESP: Earnings ESP for Sherwin-Williams is currently pegged at +0.29%. This is because the Most Accurate estimate stands at $5.74 while the Zacks Consensus Estimate is pegged at $5.72. 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, in its second-quarter call, stated that it expects mid-to-high single digit percentage increase in net sales year over year for third-quarter 2018. The company also raised adjusted earnings guidance for 2018 to $19.05-$19.35 per share from the previous projections of $18.35-$18.95. It expects favorable demand trends across most businesses and geographies to support growth expectations.

The Zacks Consensus Estimate for consolidated net sales for Sherwin-Williams for the third quarter is $4,779 million, reflecting an expected year-over-year increase of around 6%.

Net sales from the Americas Group segment for the third quarter is projected to increase roughly 8% from the year-ago quarter as the Zacks Consensus Estimate for the third quarter is currently pegged at $2,749 million.

Net sales from the Consumer Brands Group segment for the third quarter is projected to increase roughly 3% year over year as the Zacks Consensus Estimate for the third quarter is currently pegged at $746 million.

For the Performance Coatings Group segment, net sales for the third quarter is projected to go up roughly 6% year over year as the Zacks Consensus Estimate for the third quarter is currently pegged at $1,316 million.

Sherwin-Williams’ cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should yield margin benefits in the to-be-reported quarter. 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 third quarter. 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 raw material cost inflation in the second quarter, mostly due to higher propylene pricing. Sherwin-Williams, in its second-quarter call, noted that it expects year-over-year raw material inflation to be higher than what it had earlier expected in the third quarter. Nevertheless, Sherwin-Williams is taking appropriate pricing actions in the wake of raw material cost inflation, which is likely to support margins in the third quarter.

The Sherwin-Williams Company Price and EPS Surprise

 

The Sherwin-Williams Company Price and EPS Surprise

The Sherwin-Williams Company price-eps-surprise | The Sherwin-Williams Company Quote

Other 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:

CF Industries Holdings, Inc. CF has an Earnings ESP of +12.07% and carries a Zacks Rank #1.  You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Allegheny Technologies Incorporated ATI has an Earnings ESP of +2.16% and carries a Zacks Rank #3.  

Arconic Inc. ARNC has an Earnings ESP of +6.42% and carries a Zacks Rank #3.
 
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