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Bear of The Day: Sherwin Williams (SHW)

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Sherwin Williams (SHW - Free Report) , Zacks Rank #5 (Strong Sell), is a manufacturer and distributor of paints and coating products. Given that conventional wisdom favors growth in the housing sector, it feels awkward painting a negative outlook for Sherwin Williams.  However, the company is richly valued and seeing its earnings estimates cut.  The combination could leave your portfolio colored red instead of black.

Valuation is stretched:

The trade is extremely optimistic toward Sherwin Williams based on the forward earnings outlook, and as a result the bar for exceeding earnings estimates may be high.  The stock is priced at about 19.5 times forward 12 month earnings.  This compares to a 10 year average of 14.8 and minimum and maximum values of 10.2 and 22.3 respectively.  The stock is less expensive based on its PEG ratio (price to earnings ratio to earnings growth) of 1.33, which is near average.  However, no one wants average in their portfolio.  The recent rise in mortgage rates and slowdown in pending home sales suggest there is risk that the growth rate in earnings slows.  Higher mortgage rates may not only reduce new home buying, but the drop in refinance activity may cut household spending power and the dollars available for remodel.

Earnings estimates are falling:

The Zacks Consensus EPS Estimate for the September 2013 quarter has fallen $0.20 over the past 30 days, while the December 2012 quarter estimate has declined $0.23 to $1.37.  There have also been notable declines for the outlook for 2014 earnings where the Zacks Consensus Estimate has dropped $0.60 to $9.24.

No analysts have revised earnings estimates up for the coming quarters or 2014 for the past 30 days, while estimates have declined in the past 30 days for 2013 and 2014.  There is strong agreement for a reduction in the earnings outlook.

The price and consensus chart shows the peak in earnings estimates and the recent decline. The stock prices has followed the direction in earnings revisions.

An Alternative:

Investors looking for exposure to the paint and coating market may want to examine Valspar (VAL), Zacks Rank #2 (Buy). Earnings estimates for Valspar have trended flat to higher over the past 30 days and the few analyst revisions that have occurred have been up and not down.  The PEG ratio is about 1.05 and near the lower end of the 10 year range.  Valspar has stronger upward momentum to earnings revisions and looks less expensive than Sherwin Williams.

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