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Mixed Bag from Sherwin-Williams

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Sherwin-Williams Co.’s (SHW - Free Report) third-quarter 2012 adjusted earnings of $2.29 per share surpassed the Zacks Consensus Estimate of $2.19. The adjusted earnings exclude a negative currency translation impact of 5 cents a share. Including that impact, earnings were $2.24 per share in the reported quarter compared with $1.71 a year ago.

Net sales for the quarter increased 4.8% year over year to $2.60 billion, but missed the Zacks Consensus Estimate of $2.67 billion. The growth was driven by an increase in paint sales volume and selling price, partially offset by the negative impacts of currency translation.

Performance by Segment

The Paint Stores Group posted net sales of $1.55 billion in the reported quarter, up 9.6% from the year-ago period. The improvement largely stemmed from the increase in paint sales volume across all market segments as well as higher selling prices.

Segment profit increased 26.9% to $300.6 million due to higher paint sales volume and selling price, partly offset by soaring raw material prices as well as selling, general and administrative expenses.

Net sales of the Consumer Group went down 1% to $348 million, due to lower sales volumes to most of the retail customers, which were mostly offset by acquisitions and higher selling prices.

Segment profit climbed 39.3% to $57.1 million in the quarter. The increase was due to a rise in selling prices and better operating efficiencies, partly offset by escalating raw material prices.

Net sales from the Global Finishes Group declined 1% to $491.8 million in the quarter as a result of unfavorable currency translation and lower paint sales volume, partly offset by selling price increases.

The segment’s profit was $36.4 million, a 31.9% year over year surge. The growth was fueled by increased selling price, partly offset by increased raw material costs and unfavorable currency impact.

The Latin America Coatings Group sales declined 4% to $208.7 million in the quarter due to unfavorable currency translation, partly offset by selling price increases and higher paint sales volume.

Segment profit jumped 37.7% to $21.9 million in the quarter from $15.8 million in the previous year quarter, primarily due to selling price increases and higher paint sales volume.

Share Repurchase

Sherwin-Williams acquired 0.5 million shares through open market purchases in the reported quarter. The company had remaining authorization to purchase 17.25 million shares as of September 30, 2012.


For the fourth quarter of 2012, the company expects consolidated sales to increase in the mid single-digits year over year. It expects earnings per share in the band of 98 cents to $1.18 for the quarter.

For fiscal 2012, the company anticipates that consolidated net sales would increase by a high single-digit clip over 2011. It has revised the forecast for earnings per share upwards to a range of $6.35-$6.55 from the previous view of $6.20 to $6.40.

Our View

Sherwin-Williams’ philosophy is to diversify its customer base and expand its operations into various geographies. The company follows a strategy of growing through acquisitions and also through internal initiatives such as efficient working capital management and innovation. This policy enables the company to somewhat reduce its dependency upon prevailing market conditions.

However, Sherwin-Williams is facing higher raw material costs, primarily acrylic latex and titanium dioxide (a key paint pigment) in the Consumer group segment. The segment purchases raw materials for the company.

Sherwin-Williams competes with companies like E. I. du Pont de Nemours and Company and PPG Industries Inc. (PPG - Free Report) . The company retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

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