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We have retained our Neutral recommendation on Sherwin-Williams (SHW - Analyst Report) following our assessment of its fourth-quarter 2012 results. The company logged better-than-expected results in the quarter. However, we maintain a cautious stance factoring in the sustained weakness across some of its key end markets.

Why Maintained?

Sherwin-Williams’ fourth quarter revenues and earnings beat the Zacks Consensus Estimates. Higher paint sales volume and pricing led to an increase in revenues. The company’s Paint Stores Group division posted healthy results in the quarter.

Sherwin-Williams’ philosophy is to diversify its customer base and expand its operations into various geographies. It follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management and innovation.

The company continues to invest in its Paint Stores Group segment to boost market share. It is also implementing effective pricing strategies to offset higher raw materials costs.

Moreover, the $2.34 billion acquisition of Consorcio Comex S.A. de C.V. should usher in significant opportunity. The acquisition (expected to complete in first-half 2013) will enable Sherwin-Williams to expand its architectural paint business in the Americas.

However, Sherwin-Williams continues to contend with raw material costs inflation. Higher raw material costs impacted every reporting segment in the fourth quarter.

Sherwin-Williams also remains exposed to currency headwinds. The company’s Latin American operations are facing soft end-market demand and unfavorable currency translation impact.

Demand for architectural coatings also remains somewhat depressed. We do not expect a material near-term recovery in the housing and commercial construction markets.

Sherwin-Williams currently retains a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Other coatings companies with favorable Zacks Rank are Akzo Nobel NV (AKZOY), PPG Industries Inc. (PPG - Analyst Report) and The Valspar Corporation (VAL - Analyst Report). All of them hold a Zacks Rank #2 (Buy).

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