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Sherwin-Williams to be Aided by Valspar Buyout, Cost Control

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We issued an updated research report on The Sherwin-Williams Company (SHW - Free Report) on May 28.

Sherwin-Williams’ shares have moved up 17% over a year, outperforming the industry’s 13.2% growth.

Sherwin-Williams is well placed to gain from significant synergies of the Valspar acquisition. Its cost-control initiatives, working capital reductions, supply chain optimization and productivity improvement should also continue to yield margin benefits. Working capital management and efforts to cut operating costs are also helping the company generate healthy cash flows. Cost control actions also contributed to an expansion in operating margins in the company’s Americas Group unit in the first quarter.

The Valspar acquisition also allowed Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies. The buyout will extend Sherwin-Williams’ brand portfolio and customer relationships in North America and bolster its global finishes business. Sherwin-Williams expects to achieve $320 million in annual run-rate synergies by the end of 2018, which is expected to provide a benefit of $140-$160 million to its bottom line.

Sherwin-Williams expects mid-to-high single digit percentage increase in net sales year over year for second-quarter 2018. It also sees incremental sales from Valspar acquisition to be around $600 million for April and May, in the quarter. The company also expects incremental sales from Valspar to be roughly $1.7 billion for the first five months of 2018.

However, Sherwin-Williams faces earnings headwinds from sizable charges related to Valspar acquisition. Sherwin-Williams expects charges related to the Valspar acquisition to be $3.40-$3.50 per share for 2018.

The company, in April, also lowered its earnings per share guidance for 2018 to the range of $14.95 to $15.45 per share from its earlier view of $15.35 to $15.85 per share factoring in a 40 cents per share net reduction associated with an expanded customer agreement, mostly affecting the Valspar business.

Moreover, Sherwin-Williams remains exposed to raw material cost pressure. The company has witnessed a spike in raw material costs in the first quarter, mostly affecting its Performance Coatings unit. It sees higher year over year input costs in first-half 2018 and projects average inflation to be in the 4% to 6% band.

The Sherwin-Williams Company Price and Consensus

Zacks Rank & Stocks to Consider

Sherwin-Williams currently carries a Zacks Rank #3 (Hold).

Some better-ranked companies in the basic materials space are FMC Corporation (FMC - Free Report) , Huntsman Corporation (HUN - Free Report) and The Chemours Company (CC - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

FMC Corp has an expected long-term earnings growth rate of 13.6%.  Its shares have gained around 19.6% over a year.

Huntsman has an expected long-term earnings growth rate of 8.3%.  Its shares have moved up around 33.4% over a year.

Chemours has an expected long-term earnings growth rate of 15.5%.  Its shares have gained around 22.4% over a year.

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