The Sherwin-Williams Company (SHW - Free Report) is benefiting from its focus on growth through expansion of operations, its productivity improvement initiatives and synergies of the Valspar acquisition amid certain headwinds including raw material cost inflation and soft non-domestic demand.
The paints and coatings giant, which currently carries a Zacks Rank #3 (Hold), has seen its shares gain 20.4% year to date, outperforming the 16.5% rise of its industry.
What’s Going in SHW’s Favor?
Sherwin-Williams is seeing favorable demand in its domestic end-use markets and remains committed to expand its retail operations. It is focused on capturing a larger share of its end-markets, as reflected by an increasing number of retail stores. The company added 76 net new stores in 2018 in its Americas Group unit. It also added 15 stores in the first quarter. Plans are in place to add around 90-100 net new stores in 2019.
The Valspar acquisition has also enabled Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies. The company is gaining from significant acquisition synergies. Sherwin-Williams expects incremental synergies of roughly $70-$80 million in 2019, with total annual run rate of around $415 million at the end of the year.
Sherwin-Williams’ cost control initiatives, working capital reductions, supply chain optimization and productivity improvement are also yielding margin benefits. Working capital management and efforts to cut operating costs are also helping the company to generate strong cash flows.
A Few Concerns
Sherwin-Williams is seeing weak demand outside of the United States. The company witnessed relatively softer demand in non-domestic regions during the first quarter, especially Asia Pacific and Europe, where sales fell high single and mid single-digits, respectively, in the first quarter. Trade issues have led to softness in markets in Asia.
The company also remains exposed to raw material cost pressure. It witnessed higher raw material costs in the first quarter. Sherwin-Williams expects inflation to be in the low-single digits year over year for full-year 2019. Some input cost pressure will likely continue in the second quarter.
Sherwin-Williams also faces currency translation headwinds. In the first quarter, performance of all of its three segments were affected by unfavorable currency translation. Currency translation reduced first-quarter sales of the Performance Coatings Group by roughly 4% and also hurt segment profits. Also, the company’s Latin America business saw a high single-digit decline in the first quarter due to unfavorable currency swings. Currency may remain a headwind in the second quarter.
Stocks Worth a Look
A few better-ranked stocks in the construction space include EMCOR Group, Inc. (EME - Free Report) , Arcosa, Inc. (ACA - Free Report) and NVR, Inc. (NVR - Free Report) .
EMCOR has an expected earnings growth rate of 11% for the current year and carries a Zacks Rank #1 (Strong Buy). The company’s shares have gained around 7% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arcosa has an expected earnings growth rate of 14.3% for the current year and carries a Zacks Rank #1. Its shares have rallied roughly 31% in the past year.
NVR has an expected earnings growth rate of 1.8% for the current year and carries a Zacks Rank #1. Its shares are up around 9% in the past year.
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