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Sherwin-Williams Reports In Line

SHW PPG

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Sherwin-Williams Co. (SHW - Analyst Report) reported net earnings of 84 cents per share in the fourth quarter of 2011 excluding income tax expense of 70 cents per share compared with 67 cents per share in the year-ago quarter and in line with the Zacks Consensus Estimate. 

For the full year 2011, the company’s earnings were $4.84 per share (excluding income tax expense of 70 cents per share) compared with $4.39 per share (excluding one time charges of 18 cents per share) in 2010.

Net sales for the quarter increased 9.2% year over year to $2.07 billion, driven by acquisitions and selling price increases. Sales were also boosted by increased paint sales volume in the Global Finishes and Latin America Coatings Groups. For the full year 2011, sales increased 12.7% to $8.77 billion.                                                    

Performance by Segment

During the fourth quarter, the company further divided its segments into four from three due to increased revenue growth and geographic expansion of itsGlobal Finishes Group. The company formed The Latin America Coatings Group as a stand alone group which was initially a part of the Global Finishes Group.

The Paint Stores Group posted net sales of $1.13 billion in the reported quarter, up 13.5% from the year-ago period. The improvement was largely attributed to selling price increases and expanding domestic architectural paint sales volume across most segments.

Segment profit decreased to $133.4 million from $134.8 million in the prior year due to higher raw material costs and increases in selling, general, and administrative expenses, and increased asset impairment charges. The enhanced costs were partially offset by rising selling prices and higher paint sales volume.

Net sales of the Consumer Group declined 1.1% from the same period last year to $252.1 million, primarily due to the loss of a portion of a paint program with a large retail customer. Segment profit increased to $30.2 million in the quarter from $26.1 million in the year ago quarter. The increase was due to a rise in selling prices and better cost management which was partially offset by increasing raw material prices.

Net sales of the Global Finishes Group soared 8.1% to $463.3 million in the quarter as a result of acquisitions, and selling price increases. The segment’s profit was $13.0 million, up from $9.2 million recorded during the corresponding quarter of 2010. The progress was achieved derived from increased paint sales volume, good sales control, lesser asset impairment charges, partially offset by increased raw material costs and dilution from expenses.

The Latin America Coatings Group posted sales of $220.1 million in the quarter, up 4.0% due to selling price increases and higher paint sales volume, partially offset by unfavorable currency translation changes.

Segment profit was $26.4 million in the quarter compared with $19.6 million in the previous year quarter, due primarily to increased paint sales volume and selling price increases, partially offset by increases in raw material costs and selling, general and administrative expenses. Foreign currency translation rate changes decreased segment profit to $1.9 million in the quarter.

Share Repurchase

Sherwin-Williams acquired 460,000 shares of its common stock through open market purchases in the quarter, bringing the total purchase to 4.70 million shares in the year. The company had remaining authorization at December 31, 2011 to purchase 21.05 million shares.

Outlook

For the first quarter of 2012, the company expects consolidated sales to increase in the range of 9% to 14% compared with the first quarter of 2011.

Sherwin Williams expects net income per common share in the first quarter of 2012 to be in the range of 56 cents to 74 cents per share.

For fiscal 2012, the company anticipates that consolidated net sales would increase above the 2011 levels by a high single-to-low-teens percentage. Further, it forecasts net income per common share for 2012 to be in the range of $5.37 to $5.67 per share.

Our Viewpoint

Despite weak housing markets, the company continues to invest in its core Paint Stores Group in order to boost market share. We believe that even if there is a modest improvement in the market in the near term, strong sales in the Paint Stores Group will put Sherwin Williams in a better position. We further believe that Sherwin Williams will expand its footprint through meaningful acquisitions and consolidate the North American paint industry.

However, raw material prices remain a concern for the company. The price of its key input titanium dioxide (TiO2) has been escalating and continues to be a headwind for the company. Furthermore, Sherwin Williams faces stiff competition from PPG Industries Inc. (PPG - Analyst Report).

In view of the above stated reasons, the company retains a Zacks #2 Rank, indicating a short-term (1 to 3 months) Buy rating and we have recommended the shares of the company as Neutral for the long-term (more than 6 months).

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