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Sherwin-Williams (SHW - Analyst Report) saw its profit jump in fourth-quarter 2013 on gains across its Paint Stores Group and Consumer Group divisions, but its earnings trailed expectations.  

The Ohio-based paint maker’s profit, as reported, shot up roughly 71% year over year to $116.1 million or $1.14 per share in the quarter from $68.1 million or 65 cents a year ago. The year-ago quarter’s bottom-line was hurt by hefty charges associated with the company’s settlement with the U.S. Department of Labor.

Barring charges associated with early retirement of debt, earnings of $1.16 per share, however, missed the Zacks Consensus Estimate of $1.27.

Sherwin-Williams, whose well-known brands include Dutch Boy, Minwax and Krylon, recorded net sales of around $2,457 million in the quarter, a roughly 11% year over year rise. It exceeded the Zacks Consensus Estimate of $2,419 million.

Increased paint sales volume of Sherwin-Williams’ Paint Stores Group and favorable impact of acquisitions led to higher sales in the quarter. Acquisitions contributed 4.6% to the rise in revenues in the quarter while currency swings had an unfavorable impact of 1.1%.

For full-year 2013, profit went up roughly 19% year over year to $752.6 million or $7.26 per share from $631 million or $6.02 a year ago. Adjusted (excluding one-time charges) earnings of $7.49 per share fell short of the Zacks Consensus Estimate of $7.60.

Revenues for the full year rose around 7% year over year to roughly $10,186 million, beating the Zacks Consensus Estimate of $10,136 million.

Sherwin-Williams also provided lower-than-expected earnings guidance for the first quarter and full-year 2014. Its shares were down roughly 5% in pre-market trading.

Segment Review

The Paint Stores Group unit registered net sales of $1.46 billion in the reported quarter, up 17.6% from the year-ago quarter. The gain was led by increased architectural paint sales volume across all end market segments as well as acquisitions which contributed 7.5% to the increase.

Net sales of the Consumer Group unit rose 6.6% to $272.6 million due to increased sales volume to most of retail customers. Acquisitions increased net sales of the segment by 1.3% in the reported quarter.

Net sales from the Global Finishes Group segment moved up 2% to $496.9 million in the quarter as higher selling prices and acquisitions offset unfavorable currency impact.

The Latin America Coatings Group net sales fell 4% to $222.2 million as higher selling prices were offset by unfavorable currency translation which reduced sales by 9.4%.
 
Balance Sheet and Share Repurchases

Sherwin-Williams ended 2013 with cash and cash equivalents of roughly $745 million, down roughly 14% year over year. Long-term debt decreased 31% year over year to around $1,122 million.

Sherwin-Williams acquired 1.5 million shares through open market purchases in the reported quarter. The company had remaining authorization to purchase 12.15 million shares as of Dec 31, 2013.

Comex Acquisition

Sherwin-Williams, in Sep 2013, completed its takeover of the U.S. and Canadian businesses of Mexico’s leading paint company Consorcio Comex S.A. de C.V. for $90 million in cash and assumed liability of around $75 million. The acquisition is a strategic fit for the company and will enable it to better serve its customers across some of its key markets.

Sherwin-Williams, in Nov 2012, agreed to buy Comex for roughly $2.34 billion, including debt. While the company has closed the takeover of its U.S. and Canadian businesses, it is yet to secure the green light from the Federal Competition Commission of Mexico to complete the acquisition of Comex’s core Mexican operations.  

Sherwin-Williams’ appeal related to the pending acquisition was denied and the acquisition was declared unauthorized by the Federal Economic Competition Commission of Mexico in Oct 2013. The company, however, is optimistic about closing the acquisition.

Sherwin-Williams ended 2013 with 3,908 stores in operation which include 306 stores added through the Comex acquisition.

Outlook

Sherwin-Williams, which is among the leading paint companies along with PPG Industries Inc. (PPG - Analyst Report) and Akzo Nobel NV (AKZOY), expects consolidated sales to increase 8%-13% year over year in 2014. It expects earnings per share in the band of $8.12 to $8.32 for the year. This is below the current Zacks Consensus Estimate of $9.18.

The guidance assumes that the Comex acquisition will increase net sales by low single-digit clip in 2014 and unfavorably impact earnings per share by 45 cents to 55 cents.

For the first quarter, Sherwin-Williams expects that consolidated net sales will rise 7%-12% year over year. It expects earnings per share in the range of 95 cents to $1.15 per share for the quarter. This is also lower than the current Zacks Consensus Estimate of $1.28.

Comex stores in the U.S. and Canada are expected to contribute $97 million to $107 million to sales in the quarter. However, the acquisition will negatively impact earnings by 15 cents to 25 cents per share.

Sherwin-Williams is a Zacks Rank #2 (Buy) stock.

Another paint company RPM International Inc. (RPM - Snapshot Report) retains a Zacks Rank #2 (Buy).

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