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Sherwin-Williams Co. (SHW - Analyst Report) reported net earnings of $2.21 per share in the second quarter of 2012 versus $1.74 per share in the year-ago quarter. The results surpassed the Zacks Consensus Estimate of $2.12.


The second-quarter 2012 earnings excluded negative impact of 4 cents from currency translation, while second-quarter 2011 earnings included charges of 8 cents related to repurchase of long-term debt. Including these charges, earnings were $2.17 per share in the reported quarter compared with $1.66 in the year-ago quarter.


Net sales for the quarter increased 9.3% year over year to $2.57 billion, surpassing the Zacks Consensus Estimate of $2.68 billion. The growth was driven by an increase in paint sales volume and selling price, partially offset by negative impacts of currency translation.


Performance by Segment


The Paint Stores Group posted net sales of $1.49 billion in the reported quarter, up 14.6% from the year-ago period. The improvement largely stemmed from the increase in paint sales volume and selling price.


Segment profit increased 29% to $267 million from $206.6 million in the prior year due to higher paint sales volume and selling price, partially offset by soaring raw material prices as well as selling, general and administrative expenses.


Net sales of the Consumer Group went up 5.9% to $397.7 million, driven by an increase in selling price and higher sales volume.

Segment profit climbed 31.6% to $80.8 million in the quarter. The increase was due to a rise in selling prices and better cost management, which was partially offset by escalating raw material prices.


Net sales of the Global Finishes Group soared 3.3% to $498.7 million in the quarter as a result of acquisitions, higher selling price and paint sales volume.

The segment’s profit was $48 million, jumping 58.9% year over year. The progress achieved can be ascribed to increased paint sales volume and selling price, partially offset by increased raw material costs.


The Latin America Coatings Group sales declined 4.5% to $187.3 million in the quarter due to unfavorable currency translation changes, partially offset by selling price increases and higher paint sales volume.


Segment profit dropped 70% to $9.3 million in the quarter from $15.8 million in the previous year quarter, primarily due to escalation in raw material costs and negative foreign currency translation, partially offset by improved paint sales volume and selling price increases.


Share Repurchase


Sherwin-Williams acquired 1.5 million shares of its common stock through open market purchases in the reported quarter. The company had remaining authorization to purchase 17.75 million shares as of June 30, 2012.


Outlook


For the third quarter of 2012, the company expects consolidated sales to increase in the mid single digits compared to the prior-year quarter. It expects earnings per share in the band of $2.05-$2.20 for the quarter.


For fiscal 2012, the company anticipates that consolidated net sales would increase above the 2011 levels by a high single digit-to-low-teens percentage. It has revised the forecast for earnings per share upwards to a range of $6.20-$6.40 from the previous range $5.75 to $6.05.


Our View


Sherwin-Williams’ philosophy is to diversify its customer base and expand its operations into various geographies. The company follows a strategy of growing through acquisitions and also through internal initiatives such as efficient working capital management and innovation. This policy enables the company to somewhat reduce its dependency upon prevailing market conditions.


However, Sherwin-Williams is facing higher raw material costs, primarily acrylic latex and titanium dioxide (a key paint pigment) in the Consumer group segment. The segment purchases raw materials for the company.


Sherwin-Williams competes with companies like E. I. du Pont de Nemours and Company (DD - Analyst Report) and PPG Industries Inc. (PPG - Analyst Report). The company retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.
 

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