Sherwin-Williams (SHW, Financial), a $2.3 billion paint and coatings company, hit a new 52-week high after the company posted its third-quarter results toward the end of the last month. It is currently trading close to its 52-week high, and above the 50-day and 200-day moving average with a steep rise of over 28% in the past year and year-to-date gains of over 30%, thrashing S&P 500’s total return of 12.3%. Is the company set to sustain the momentum or investors should be cautious and wait for a pullback? Let’s take a look at the third-quarter results and the underlying business of the company.
Quarterly performance
Sherwin-Williams posted a 10.6% year-over-year growth in third-quarter revenue to clock $3.151 billion, marginally missing the consensus estimates of $3.152 billion. The growth in revenue came on the back of strong performance of the company’s Paint Stores, Global Finishes and Consumer Group, and the favorable impact of acquisitions. The comparable-store sales, or comps, grew 9.6% year-over-year reflecting upon the strong organic growth also. Organic growth is the least capital intensive road to growth.
Acquisitions contributed 3.3% to revenue in the third quarter, whereas forex fluctuations had negative impact of 0.7%. Had it not been for the negative impact of the forex fluctuations, the company would have beaten the consensus estimates.
Improving trends
On the back of improved operating results in its Paint Stores, Global Finishes and Consumer Groups, the company’s earnings jumped a whopping 31.4% year-over-year to record $3.35 per share in the third quarter, comfortably beating the consensus estimates of $3.18 per share. The adjusted earnings per share came in at $3.39.
Being a shareholder-friendly management team, the company bought back 2 million shares in the reported quarter, and hiked quarterly dividend to $0.55 per share from $0.50 earlier. Year-to-date the total share purchases amount to 5.33 million. At the end of September 2014, the company had remaining authorization to repurchase 6.83 million shares. Share buybacks in the future also will improve the bottom line and return value to shareholders.
The automobile and housing market will be growth drivers going forward. The company is making moves to consolidate its long-term goal of being the market leader in architectural and protective coatings throughout the Americas, including Latin America.
Going forward, the company revised upwards its earnings guidance for 2014 to a range of $8.70–$8.80 per share versus $8.50–$8.70 per share earlier. Analysts expect this to be $8.64. This assumes that the Comex acquisition will result in net sales increase by a low single-digit percentage and impact the bottom line negatively by $0.28 per share. The acquisition is expected to start yielding earnings in the range of $0.08 to $0.13 from fiscal 2015, representing an accretion of $0.36-$0.41 per share on long-term basis.
The earnings guidance for fiscal 2014 is based on expectation that consolidated net sales will increase in the range of 9% to 11% versus fiscal 2013.
A concern
However, the only downside in the quarter was a 4% year-over-year decline in the Latin America Coatings Group’s net sales, as unfavorable currency movements more than wiped off the gains due to higher selling prices, resulting in 7.8% lower sales and reduced sales volumes. For the past two years, the company has faced a difficult market situation in Latin America.
The performance of the company in Latin America is something that investors need to watch very carefully. As it is, shares are trading at high valuation and a slight pullback in market and/or worsening of performance in the Latin America due to negative impact of forex movements or softening of housing market growth can bring the share price down, which currently is trading near its 52-week high.
Conclusion
Barring weakness in Latin America, Sherwin looks on track to deliver good growth in the long run. The company is making good progress across different segments, and the trend looks set to continue in the future, making it a smart investment.
