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What's in Store for Sherwin-Williams (SHW) in Q4 Earnings?

Zacks Equity Research

The Sherwin-Williams Company SHW is set to release fourth-quarter results before the opening bell on Jan 31.

In the third quarter, the paints and coatings giant posted adjusted earnings of $5.68 per share, which lagged the Zacks Consensus Estimate of $5.71.

Third-quarter revenues of $4,731.5 million rose roughly 5% year over year on higher selling prices and increased paint sales volumes in the Americas Group and Consumer Brands Group units. However, revenues missed the Zacks Consensus Estimate of $4,779 million.

Sherwin-Williams beat the Zacks Consensus Estimate in two and missed it in two of the trailing four quarters, the average positive surprise being around 2.1%.

Shares of Sherwin-Williams have moved down 5.8% over a year, compared with the industry’s 3.8% decline.



Let’s see how things are shaping up for this announcement.

Factors at Play

Earlier this month, Sherwin-Williams released its preliminary unaudited sales and earnings figures for the fourth quarter and 2018. The company now sees earnings for 2018 of $11.15 per share, below its guidance of $13.85 to $14.00 issued in October 2018. The company cited lower fourth-quarter sales and non-operating expenses (expected to be recognized in the fourth quarter) as the main reasons backing the earnings expectations.

The company also expects adjusted earnings for 2018 to be roughly $18.53, also lower than its October guidance of $19.05 to $19.20. Adjusted earnings for 2018 represent an increase of roughly 23% on a year-over-year basis.

The company noted that its consolidated net sales for the fourth quarter rose around 2% year over year, well short of its earlier guidance of a mid-single digit percentage increase.

Sherwin-Williams also said that its fourth-quarter performance was disappointing across the board compared with its earlier expectation. The weaker-than-expected sales growth in the quarter was largely due to weak sales growth at its North American stores in October and November. The company also witnessed lower-than-expected sales for its Consumer Brands and Performance Coatings Groups in the quarter.

The Zacks Consensus Estimate for revenues for the fourth quarter for Sherwin-Williams is currently pegged at $4,055 million, reflecting a 1.9% growth on a year over year comparison basis.

The Zacks Consensus Estimate for the company’s Americas Group segment’s fourth-quarter sales is pegged at $2,322 million, calling for year-over-year growth of 6%.

The Zacks Consensus Estimate for the Consumer Brands Group segment’s fourth-quarter sales is pegged at $589 million, reflecting an expected year-over-year growth of roughly 3%.

Moreover, the Zacks Consensus Estimate for the Performance Coatings Group segment’s fourth-quarter sales is pegged at $1,270 million, indicating an expected rise of 4.3% year over year.

Sherwin-Williams’ cost-control initiatives, working capital reduction, 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 generate healthy cash flow.

The company should also gain from synergies of the Valspar acquisition. The company expected to achieve $320 million in annual run-rate synergies by the end of 2018, which is expected to contribute $140-$160 million to its margin.

Moreover, Sherwin-Williams remains committed to expand its retail operations. It is focused on capturing a larger share of its end-markets, as reflected by an increasing number of retail stores. Per the company’s recent guidance, preliminary net sales from stores in the United States and Canada (open for more than 12 calendar months) went up roughly 3% in the fourth quarter.

However, Sherwin-Williams faces raw material cost pressure. The company saw higher-than-expected raw material cost inflation in the third quarter, mostly due to higher crude oil and propylene pricing. Nevertheless, Sherwin-Williams is taking appropriate pricing actions in the wake of raw material cost inflation, which is likely to support margins in the fourth quarter.

The Sherwin-Williams Company Price and EPS Surprise

 

The Sherwin-Williams Company Price and EPS Surprise | The Sherwin-Williams Company Quote

 

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Sherwin-Williams in the fourth quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Earnings ESP: Earnings ESP for Sherwin-Williams is 0.00%. The Zacks Consensus Estimate for fourth-quarter earnings per share is pegged at $3.56. 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, which when combined with a 0.00% ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few companies in the basic materials space you may want to consider, as our model shows these have the right combination of elements to post an earnings beat this quarter:

New Gold Inc. NGD has an Earnings ESP of +166.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Osisko Gold Royalties Ltd OR has an Earnings ESP of +71.43% and carries a Zacks Rank #3.

Teck Resources Limited TECK has an Earnings ESP of +6.03% and carries a Zacks Rank #3.

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