Tax reform has been a major influence on companies during the current earnings season, and many of the largest beneficiaries from new tax laws have been businesses that one might not have expected to top the list of big winners from lower tax rates. Sherwin-Williams (NYSE: SHW) has a relatively pedestrian business as a specialist in paint and coatings, looking to take advantage of solid demand among consumers and professional contractors in order to expand its sales and profits.
Coming into Tuesday's fourth-quarter financial report, Sherwin-Williams investors were fairly optimistic about the paint company's prospects. The numbers that Sherwin-Williams reported were mixed, but the big boon from tax reform and positive projections for 2018 pointed toward future success . Let's take a closer look at Sherwin-Williams and what its latest results can tell us about its potential.
Sherwin-Williams keeps climbing
Sherwin-Williams' fourth-quarter results said as much about investors' high expectations as they did about the fundamentals of the paint business. Overall revenue climbed 43% to $3.98 billion, topping the $3.94 billion that those following the stock were looking to see. Yet Sherwin-Williams reported adjusted earnings of $2.95 per share, and although that was well above year-earlier figures, it fell short of the consensus forecast among investors for $3.12 per share.
One key thing to consider, however, was that Sherwin-Williams chose to exclude the net income contribution that the Valspar acquisition had on its overall numbers. When you put that back in, consolidated earnings of $3.16 per share arguably topped what Sherwin-Williams investors had wanted to see. Yet even when you take out the positive impacts of the Valspar acquisition, organic sales from core Sherwin-Williams business was up nearly 7% from the year-ago quarter.
Tax reform had a huge impact on Sherwin-Williams' numbers. The company estimates that lower tax rates going forward will save it almost $669 million on its deferred tax liabilities. That resulted in a huge boost of fully $7 per share on its bottom line for the quarter.
Fundamentally, Sherwin-Williams performed well. Net sales in the Americas group were higher by 9% with greater volumes of architectural paint helping to support price increases. Comparable sales from stores in the U.S. and Canada climbed 8.2%, and profit for the segment was higher by more than 20% from year-earlier figures. Valspar provided huge lift for the consumer brands group and performance coatings group, which saw monumental top-line growth of 96% and 160%, respectively. Profitability in those two segments suffered from acquisition-related impacts and higher raw material costs, but improved internal efficiency in operations and cost controls helped to minimize the overall impact on segment profit.
Sherwin-Williams CEO John Morikis celebrated the completion of a landmark year for the company. "2017 was a year of record sales, net income, earnings per share, cash, and EBITDA," Morikis said, "but it will best be remembered as the year in which we joined forces with Valspar." The CEO acknowledged the relative weakness in consumer brands, but he saw the progress that the unit made as positive in the long run.
Can Sherwin-Williams paint the town red in 2018?
Sherwin-Williams is optimistic about its future. As Morikis explained it, the Valspar acquisition "is transforming Sherwin-Williams into a faster-growing, financially stronger and more profitable enterprise, [and] these efforts will continue throughout 2018 with similar effect."
Guidance for the near-term future underscored the positive attitude that the company has. For the first quarter, sales should climb mid- to high-single-digit percentages from the year-earlier period, with Valspar bringing in roughly $1 billion in additional revenue for the quarter. For the full 2018 year, Sherwin-Williams expects earnings of $15.35 to $15.85 per share, but that range is depressed somewhat by an anticipated $3.45 per share in acquisition costs related to Valspar. Add that figure back in, and the projections are ahead of the roughly $18.50 per share in earnings that investors in the stock have anticipated for the coming year.
Sherwin-Williams investors had mixed opinions about the news, and the stock traded on either side of unchanged in premarket trading following the announcement. Nevertheless, with sizable positive impacts from tax reform now having benefited the paint specialist, Sherwin-Williams is in position to keep reaping the rewards of a strong environment for its core products.
10 stocks we like better than Sherwin-Williams
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Sherwin-Williams wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 2, 2018