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Will Hurricanes Hit Sherwin-Williams (SHW) Q3 Earnings?

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The Sherwin-Williams Company (SHW - Free Report) is set to release third-quarter 2017 results ahead of the bell on Oct 24.

In the last quarter, the paints and coatings company reported a negative earnings surprise of 0.44% by posting adjusted earnings of $4.52 per share. The figure missed the Zacks Consensus Estimate of $4.54.

Sherwin-Williams recorded net sales of $3,735.8 million in the quarter, marking a 16% year-over-year rise. Revenues beat the Zacks Consensus Estimate of $3,571.9 million.

Sherwin-Williams beat the Zacks Consensus Estimate in two of the trailing four quarters, while missing in the other two, delivering an average positive surprise of around 3.03%.

Shares of Sherwin-Williams have moved up 10.5% in the last three months, outperforming the industry’s 6.9% growth.

 

 

Can Sherwin-Williams surprise investors this earnings or is it heading for a possible pullback? Let’s see how things are shaping up for this announcement.

Factors at Play

Last month, Sherwin-Williams provided its revised guidance for third-quarter 2017 after hurricanes affected its stores. The company lowered its profit outlook for the third quarter to reflect the impact of Hurricanes Harvey, Irma and Maria on its operations in Texas, Florida, the Caribbean and neighboring areas as well as disruptions from two earthquakes in Mexico.

Sherwin-Williams noted that the hurricanes affected more than 600 stores while 40 locations in the Caribbean still remain closed. Sherwin-Williams operates 706 paint stores across Texas, Florida and the Caribbean and has 145 company-operated stores and 387 dedicated dealers in Mexico.

As a result of the aforementioned disruptions, the company envisions third-quarter revenues in its Americas Group unit to be reduced by $50-70 million. It also sees its third quarter sales and profits to be hurt by lost sales days, costs associated with the clean-up and recovery initiatives and tightened supply of certain raw materials.

Considering the impacts of hurricanes and earthquakes, Sherwin-Williams now expects its core net sales to rise by a low-single digit clip year over year in the third quarter compared with its earlier view of a low to mid-single digit percentage increase.

At this expected sales level, the company now expects earnings for the third quarter to be in the band of $3.40-$3.70 per share, down from its earlier view of $3.70-$4.10. The revised outlook includes a $1.10 per share charge associated with the Valspar acquisition and a 40-60 cents per share increase from Valspar operations.

Notably, the company is expecting the current sales momentum to continue in most geographies, especially in the company-operated stores in the unaffected regions of the United States and Canada. This will allow the company to recover some of the third-quarter earnings shortfall over the remainder of 2017.

Sherwin-Williams, in June, closed its acquisition of Valspar, creating a premier global paints and coatings company. The buyout has positioned it as a leading paints and coatings provider globally. However, the company also faces earnings headwinds from sizable charges related to this buyout. It now expects charges related to the Valspar acquisition to be a $2.50 per share for 2017, roughly six times higher than its previous expectation of 40 cents per share.

Earnings Whispers

Our proven model does not conclusively show that Sherwin-Williams is likely to beat the Zacks Consensus Estimate this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Zacks ESP: Earnings ESP for Sherwin-Williams for the third quarter is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at $4.70. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Sherwin-Williams currently carries a Zacks Rank #3, which when combined with a 0.00% ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Estimates

Here are some companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Air Products and Chemicals, Inc. (APD - Free Report) has an Earnings ESP of +0.34% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

FMC Corporation (FMC - Free Report) has an Earnings ESP of +0.88% and flaunts a Zacks Rank #1.

United States Steel Corporation (X - Free Report) has an Earnings ESP of +1.92% and carries a Zacks Rank #3.

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