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Sherwin-Williams Co. (SHW - Analyst Report) reported first-quarter 2013 earnings of $1.11 per share, surpassing the Zacks Consensus Estimate of $1.08 and exceeding the prior-year quarter’s earnings of 95 cents per share. While unfavorable currency translation reduced earnings by 2 cents a share, acquisitions had no material impact.

Operational Update

Sherwin-Williams, which is among the leading coatings companies along with PPG Industries Inc. (PPG - Analyst Report), Akzo Nobel NV (AKZOY) and The Valspar Corporation (VAL - Analyst Report), posted net sales of $2.17 billion in the quarter, a 1.4% year over year rise. It met the Zacks Consensus Estimate. The improvement was driven by a positive impact of acquisitions and an increase in paint sales volume, partly offset by the negative impacts of currency translation.

Cost of sales in the first quarter was $1.2 billion, flat year over year. Gross profit increased 6% year over year to $963 million. Consequently, gross margin expanded 180 basis points (bps) to 44% in the quarter.

Selling, general and administrative expenses went up 3% year over year to $779 million. Operating profit rose 21% to $184 million. Operating margin increased 140 bps to 8.5% in the quarter.

Performance by Segment

The Paint Stores Group posted net sales of $1.17 billion in the reported quarter, up 4% from the year-ago period. The improvement largely stemmed from the increase in architectural paint sales volume across all market segments. Segment profit increased 15% to $129.7 million due to higher paint sales volume and selling prices, partly offset by soaring raw material prices as well as selling, general and administrative expenses.

Net sales of the Consumer Group unit decreased 3.7% to $308.6 million due to the elimination of a portion of a paint program with a large number of retail customers, partly offset by acquisitions. Segment profit declined 2% to $54 million in the quarter from $55.3 million in the year ago quarter, primarily due to lower sales volume.

Net sales from the Global Finishes Group segment went up marginally by 0.8% to $486.8 million in the quarter as a result of selling price increases and acquisitions, partly offset by unfavorable currency translation. The segment’s profit jumped 18% to $33.9 million from $28.6 million in the year ago quarter. The growth was fueled by increased selling price, increased paint sales volume, and efficiencies gained, partly offset by unfavorable currency translation and acquisitions.

The Latin America Coatings Group sales decreased 2.9% to $202.6 million in the quarter due to negative impact of currency translation, partly offset by an increase in selling price. Segment profit jumped 4.5% to $20.8 million in the quarter from $19.9 million in the previous year quarter, primarily due to good expense control and selling price increases, partly offset by unfavorable foreign currency translation rate changes.

Share Repurchase

Sherwin-Williams acquired 0.5 million shares through open market purchases in the reported quarter. The company had remaining authorization to purchase 15.95 million shares as of Mar 31, 2013.

Financial Position

Cash and cash equivalents were $613 million as of Mar 31, 2013, compared with $25 million as of Mar 31, 2012. Long-term debt stood at $1.6 billion as of Mar 31, 2013, compared with $637 million as of Mar 31, 2012.

For first-quarter 2013, capital expenditures were $31 million, compared with $33 million in the prior-year quarter. Debt-to-capitalization ratio expanded 170 bps year over year to 47% as of Mar 31, 2013.

Outlook

For the second quarter of 2013, the company expects consolidated sales to increase 5%-9% year over year. It expects earnings per share in the band of $2.50 to $2.60 for the quarter.

For 2013, the company anticipates that consolidated net sales would increase by a mid single-digit clip over 2012. It forecasts net income per share to be in the range of $7.45 to $7.55 per share.

Our View

Sherwin-Williams continues to invest in its core Paint Stores Group to boost market share. The company follows a strategy to diversify its customer base and expand its operations into various geographies which will reduce its dependency upon prevailing market conditions. An improvement in the market demand in the near term will place the company in a better position.

Sherwin-Williams is maintaining its approach of growing through acquisitions and also through internal initiatives such as efficient working capital management and innovation. Moreover, the acquisition of Comex should usher in significant opportunity. However, soaring raw material prices remain a concern for the company. It also remains exposed to currency headwinds.

Sherwin-Williams currently retains a short-term Zacks Rank #2 (Buy).
 

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