Sherwin-Williams (SHW) Poised on Valspar Buyout, Cost Cuts

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We issued an updated research report on The Sherwin-Williams CompanySHW on Nov 28.

Sherwin-Williams logged net income from continuing operations of $316.6 million or $3.33 per share for the third quarter of 2017, down roughly 18.4% from $386.7 million or $4.08 recorded a year ago. The bottom line was adversely impacted by higher raw material costs, lost sales and recovery expenses resulting from natural disasters.

Earnings, barring one-time items, came in at $4.75 per share, beating the Zacks Consensus Estimate of $4.70.

The company recorded net sales of $4,507 million in the quarter, marking a 37.4% year-over-year rise. Revenues also topped the Zacks Consensus Estimate of $4,386.4 million.

Sherwin-Williams, during third-quarter earnings call, said that the Valspar integration plans and synergy progress is in line with its expectations, as the company remains focused on strengthening performance of core businesses and newly acquired businesses. The company has also implemented appropriate pricing actions to offset the impact of increasing raw material costs.

Sherwin-Williams projects mid-to-high single digit percentage increase in net sales, year over year for the fourth quarter of 2017. The company expects earnings per share in the fourth quarter in the range of $1.97-$2.27, compared with $2.15 earned a year ago.

Sherwin-Williams' shares have moved up 17.6% in the last three months, outperforming the industry 's 14% growth.

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

The Valspar acquisition also allows Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies. The buyout will extend Sherwin-Williams' brand portfolio and customer relationships in North America, and bolster its global finishes business. Sherwin-Williams should gain from significant synergies of the Valspar acquisition.

However, the company also faces earnings headwinds from sizable charges related to Valspar acquisition. Sherwin-Williams now expects charges related to the Valspar acquisition to be $3.21 per share for 2017, higher than its previous expectation of $2.50. It also expects Valspar-related charge of 98 cents per share in the fourth quarter of 2017.

Moreover, Sherwin-Williams remains exposed to raw material cost pressure. It now expects raw material cost inflation for the paint and coatings industry to be at the top end of its mid-single digits range forecast in 2017, due to disruptions from hurricanes.

Sherwin-Williams Company (The) Price and Consensus

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

Zacks Rank & Stocks to Consider

Sherwin-Williams currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Koppers Holdings Inc. KOP , Daqo New Energy Corp. DQ and Kronos Worldwide Inc. KRO . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks Rank #1 stocks here .

Koppers has an expected long-term earnings growth rate of 18%. Its shares have moved up 23.7% year to date.

Daqo New Energy has an expected long-term earnings growth rate of 7%. Its shares have surged a whopping 178.9% year to date.

Kronos Worldwide has an expected long-term earnings growth rate of 5%. Its shares have rallied 142.8% year to date.

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Sherwin-Williams Company (The) (SHW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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