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On Aug 3, Zacks Investment Research downgraded The Sherwin-Williams Company (SHW - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Sherwin-Williams missed estimates in the second quarter of 2013, reported on Jul 18. The company’s adjusted earnings of $2.56 per share missed the Zacks Consensus Estimate of $2.58 but exceeded the prior-year quarter’s earnings of $2.17 per share. Its net sales of $2.71 billion in the quarter, represented a 5.5% year over year rise. It, however, missed the Zacks Consensus Estimate of $2.78 billion.

Sherwin-Williams is exposed to currency headwinds, volatility in raw material pricing and uncertainty surrounding Comex takeover.

Sherwin-Williams’ consumer and paint stores businesses still remains impacted by the U.S. economic weakness. Sales of architectural paint to the commercial market also remained weak, as did industrial coatings. Although demand in these end markets improved recently, it remains weak. A material near-term recovery in the housing and construction markets seems difficult.

Sherwin-Williams’ Latin American operations is facing weak end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar). Currency translation impacted the company’s Latin American operations and Global Finishes Group in the second quarter. Sherwin-Williams is expected to continue to face currency headwinds in 2013, particularly in its Latin American markets.

Sherwin-Williams continues to face volatility in raw material costs, primarily for acrylic latex, propylene and titanium dioxide (a key paint pigment). While the acquisition of Comex should bring significant opportunity for Sherwin-Williams, near term uncertainty surrounding the takeover following the recent rejection of the deal by Mexican regulators may weigh on the stock.

The Zacks Consensus Estimate for 2013 for Sherwin-Williams has gone down 5.1% to $7.66 per share as most estimates were revised lower over the last 30 days. Similarly, the Zacks Consensus Estimate for 2014 has also decreased 5.9% to $9.24 per share.

Other Stocks to Consider

Other companies in the specialty chemical space with favorabe Zacks Rank are Ferro Corp. (FOE - Snapshot Report), KMG Chemicals Inc. (KMG - Snapshot Report) and Sensient Technologies Corporation (SXT - Snapshot Report). While Ferro retains a Zacks Rank #1 (Strong Buy), KMG Chemicals and Sensient Technologies retain a Zacks Rank #2 (Buy).

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