Note to Readers: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report:1Q18 Earnings Update.
Previous Edition: Apr 24, 2018;Flash Update: 1Q18 Earnings Update.
Brokers’ Recommendations: Positive: 63.16% (12 firms); Neutral: 36.84% (7); Negative: 0.00% (0)Prev Ed: 12, 5, 0.
Brokers’ Target Price: $436.24(↓ $6.63from thelast edition; 17 firms) Brokers’ Avg. Expected Return: 18.7%
Portfolio Manager Executive Summary
The Sherwin-Williams Company (SHW or the company) engages in the development, manufacture, distribution, and sale of paints, coatings, and related products to professional, industrial, commercial, and retail customers in North and South America, the U.K., Europe, China and India.
Of the19firmsin the Zacks Digest Group covering the stock,12(63.16%) rendered positive ratingswhileseven (36.84%) assigned neutral ratingsto the stock.
Positive or equivalent outlook – (63.16%; 12/19 firms):Some of the bullish firms believe that the company’s operating income will grow over the next few years driven by the highly accretive Valspar acquisition along with solid organic growth. The acquisition has led to an expansion in geographical diversity, adding exposure to the Asia-Pacific and Europe, the Middle East and Africa (EMEA). The company also continues to deliver strong organic growth through its paint stores unit. Per the bullish firms,the change in leadership due to Valspar acquisition will help the company’s Consumer Brands segment to stabilize itself in FY18.
Neutral or equivalent outlook – (36.84%; 7/19 firms): Perthe firms, while the company will gain from acquisition synergies and a lower tax rate in FY18, increased raw material priceswill hinder margins till 2H18.The firms are also concerned about declining consumer spending and the persistence of labor shortage. The firms are also cautious about uncertainties relating to the transparency of the Valspar integration (with respect to timing of synergies and integration costs). Also, some of the firms think weakness in demand coupled with elevated raw material costs through FY18 will lead to a challenged margin performance in the Consumer Group unit.
May 1, 2018
Overview
The analysts have identified the following key factors for evaluating the investment merits of Sherwin-Williams:
Key Positive Arguments / Key Negative Arguments- Thecompany’s operating income is expected to grow over the next few years driven by the highly accretive Valspar acquisition.
- The company's actions to increase prices are expected to improve margins, fueling operating income growth. It will also gain from a lower tax rate in FY18.
- The companycontinues to deliver strong organic growth through its paint stores unit.
- While theacquisition of Valspar has made Sherwin-Williams a global leader in paints and coatings, there are uncertainties surrounding the transparency of the Valspar integration (with respect to timing of synergies and integration costs).
- Higher raw material costs will be a major risk to Sherwin-Williams’ margins in FY18.
- Weakness in demand coupled with elevated raw material costs through FY18 will lead to a challenged margin performance in the Consumer Group unit.
Headquartered in Cleveland, OH, Sherwin-Williams (SHW or the company) manufactures, distributes, and sells coatings and related products to professional, industrial, commercial and retail customers, primarily in North and South America. Sherwin-Williams made changes to its reporting structure as a result of its acquisition of Valspar (completed onJun 1, 2017) that led to the formation of three new reportable operating segments – The Americas Group, The Consumer Brands Group and The Performance Coatings Group. Earlier, the company had four operating segments – The Paint Stores Group, The Consumer Group, The Global Finishes Group and The Latin America Coatings Group. Sherwin-Williams distribute products primarily through a controlled network of4,620stores, which exclusively sell Sherwin-Williams paints.
Further information on the company is available at:
NOTE: The Company’s fiscal year ends on Dec 31.
May 1, 2018
Long-Term Growth
The firms expect Sherwin-Williams’ consolidated sales and gross profit to rise. Consequently,an improvement is anticipated in consolidated operating profit. Also,these firms expect earnings per share to improve, supported by a lower share count.
According to the firms, the company continues to launch aggressive branding campaigns, as selling paints is a consumer business by nature and the perception of brand image is critical to customers’ purchasing decisions. The firmsare of the opinion that the company is leveraging innovative technologies to broaden its product offerings as well as gain higher price points, diversify its customer base and extend its geographic reach to high-growth markets such as Latin America, Asia (China and India) and Eastern Europe.The firms also maintain thatSherwin-Williamshas significant global opportunities, especially in Brazil; its largest foreign market, where the economy is growing.
Analysts also feel the acquisition of Valspar will lead to long-term synergies, along the lines of the company’s estimates. The buyout is positive for Sherwin-Williams shareholders and adds to the growth of the company. They believe the acquisition is a strong strategic fit, complementing Sherwin-Williams’ current operations with Valspar’s packaging coatings business. Sherwin-Williams’ geographical presence will also diversify significantly with exposure in U.S. DIY, international and industrial businesses.
May 1, 2018
Target Price/Valuation
The Zacks Digest average price target is $436.24(↓$6.63 from the previous report, up18.7% from the current price).
Rating DistributionPositive / 63.16%↓
Neutral / 36.84%↑
Negative / 0.00%
Avg. Target Price / $436.24↓
Digest High / $500
Digest Low / $370↓
No. of Analysts with Target Price/Total / 17/19
Risks that could impede the achievement of the price target include raw material pricing pressure, a sustained or more severe downturn in economic conditions, increased volatility in North American residential/construction markets,lead pigment litigation risks and acquisition related risks. Sherwin-Williamshas considerable exposure to the U.S. residential and commercial construction market.Hence, a slowdown in either would be a potential headwind, along with its paint and chemical counterparts.
Recent Events
On Apr 24, 2018, Sherwin-Williams reported 1Q18 results. Following are its highlights:
- Sherwin-Williams posted earnings of $2.62 per share in 1Q18, upfrom $2.53in 1Q17.
- The companyrecorded adjusted earnings of $3.57 per share in 1Q18.
- Revenues rose44% year over year (y/y) to $3,965million in 1Q18.
Revenues
Sherwin-Williams recorded net sales of $3,965million in 1Q18, which marked a 44% y/y rise. Sales were driven by the addition of Valspar sales, higher selling prices and increased paint sales volumes in the Americas Group unit. Sales from stores in the United States and Canada (open more than 12 calendar months) increased around 5.2% in the quarter.
Segment Details
Post the acquisition of Valspar, the companymade changes to its organizational and reporting structure which resulted in establishing three new reportable operating segments namely, Americas Group, Consumer Brands Group and Performance Coatings Group.
Americas Group: This segment includes Sherwin-Williams' previous Paint Stores Group and Latin America Coatings Group. Per the company, the Americas Groupposted net sales of $2.08 billion in 1Q18, up 7% y/y. This improvement came on the back ofincreased architectural paint sales volume across most end markets and higher selling prices.
ConsumerBrands Group:This divisioncomprises Sherwin-Williams' Consumer Group and Valspar's Consumer Paints segment, excluding Valspar's Automotive Refinishes products business. Net sales for the Consumer Group surged 103% to $656.4 million in 1Q18, mainly owing to the addition of Valspar sales and higher pricing, partly masked by reduced volume sales to some of the unit’s retail customers.Meanwhile, Valspar sales increased the division’s net sales by around 108.3% in the quarter.
Performance Coatings Group: Thesegment includes Sherwin-Williams' Global Finishes Group and Valspar's Coatings Group along with Valspar's Automotive Refinishes products business. In 1Q18, thePerformance Coatings Group's net sales surged 153%to $1.23 million owing toinclusion of Valspar sales and higher selling prices.Valspar sales contributed roughly 148% to the segment’s net sales in 1Q18.
Outlook
For 2Q18, Sherwin-Williams projects mid-to-high single digit percentage increase in net sales y/y. The company also sees incremental sales from Valspar acquisition to be roughly $600million in the same quarter.
For FY18, Sherwin-Williams projects mid-to-high single digit percentage increase in net sales from FY17. It also sees incremental sales from the Valspar buyout to be roughly $1.7 billion for the first five months of the year.
Margins
Gross marginin 1Q18 was 42.5% versus 48.6% in 1Q17.Selling, general and administrative expenses rose 20.1% y/y to $1,214.6 million in 1Q18.
Segment details and outlook per the company are as follows:
Americas Group:Segment profit surgedmore than ten-foldsto $337.4 million in 1Q18from $32.2 million in 1Q17,owing to higher paint sales volume and selling price increases, partly offset by higher raw material costs. Segment profit (as a percent of net sales) roseto 16.2% in 1Q18from 15.6% a year ago.
Consumer Brands Group:Segment profit increased 32.7% to $74.2million in 1Q18 from $55.9 million in1Q17 due tothe inclusion of Valspar and higher selling prices, partly offset by increased raw material costs.Also, segment profit (as a percent of net sales) fellto 11.3% in 1Q18 from 17.3% a year ago.
Performance Coatings Group:Segment profit increased 59% to $90.8 million in 1Q18 from $57.1 million in 1Q17. The upside was owing to inclusion of Valspar and selling price increases, partly offset by higher raw material costs.As a percent to net external sales, segment profit was 7.4% in the quarter compared with 11.8% a year ago.
Earnings per Share
The company’s earnings, as reported,increased 4% to $2.62 per share in 1Q18 from $2.53in 1Q17. Adjusted earnings came in at $3.57 per share in 1Q18.
Outlook
Sherwin-Williams now anticipates FY18 earnings in the range of $14.95-$15.45 per share, down from its earlier view of $15.35 to $15.85 per share. The revised guidance includes a 40 cents per share net reduction associated with an expanded customer agreement, mostly affecting the Valspar business. The guidance also includes $3.40-$3.50 per share charge related to the Valspar acquisition.
Analyst / Payel DharCopy Editor / Subhojoy Ghosh
Content Editor / Anindya Barman
Lead Analyst / Anindya Barman
QCA / Anindya Barman
No. of brokers reported/total brokers
Reason for Update / Earnings Update
May 1, 2018
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