Sherwin-Williams (SHW, Financial) made significant progress during the year on incorporation of Canadian and the U.S. Comex stores, the biggest Paint Stores acquisitions to date. It maintained healthy sales volumes in these stores and hugely enhanced product availability and product assortment; all combined are estimated to contribute positively to the operating profit of the Paint Stores Group during 2015.
Consolidation of operations will lead to improvements
For the year, Sherwin also consolidated its Latin American Coatings Group and Paint Stores Group under a common leadership. This strategic decision is believed to allow the company to share expertise between the two key business units and enable an improved usage of its supply chain, technical and operating resources which are forecast to significantly and mutually benefit both organizations in the long term.
The integrated operations of Sherwin are estimated to deliver long-term profitability for the company at reduced costs along with the generation of superior shareholder returns.
In December, Sherwin declared its unique and innovative architectural paint schedule in Lowe's (LOW, Financial) stores countrywide under the brand name HGTV HOME.
During 2014, it delivered over $1 billion of total operating cash flows for the second year in a row owing to a superior and strategic working capital management program implemented across all its operating segments.
The nationwide accelerated launch of new products under strategically crafted brand names is believed to drive significant top-line growth for the company and, hence, improved shareholder value.
Store growth and more positives
For the year, Sherwin exceeded its earlier anticipation of introducing 80 to 90 fresh stores and concluded the year with 95 overall fresh locations and 4,003 net stores in the Caribbean, Canada and the U.S. Sherwin targets achieving its initial goal of opening 5,000 new locations in North America by adding approximately 100 to 110 stores during this approaching year.
In 2014, Sherwin has returned over $1.7 billion in cash to its shareholders through strategically executing share repurchase programs and distributing dividends. During the fourth quarter, Sherwin bought back nearly 1.6 million shares of the company stock for treasury, making its complete year share count to 6.93 million shares purchased at an average price of $214.97 per share, for a net investment of $1.49 billion.
The continued launch of new paint stores across Canada, Caribbean and the U.S. highlight the robustness of the company’s balance sheet which is further illustrated by the major share buyback program successfully executed by Sherwin, offering improved shareholder returns.
Going forward into 2015, the demand for paint and coatings in several domestic markets seems robust. Residential markets are developing significantly and turnover accelerated during the fourth quarter, also in the oil patch areas of the South, which looks healthy for the approaching year. The innovative non-residential square footage contracts grew 7% on a year-over-year basis in 2014. Moreover, there was impressive demand expansion in the core segments of apartment buildings, warehousing, hospitality and office.
Sherwin boosted its growth outlook with its sales in the most recent quarter demonstrating solid expansion and the company’s paint-stores group generating the robust growth.
Moving ahead into 2015, the robust global paint demand is believed to drive significant top-line growth for Sherwin and allow for steady shareholder returns.
The paint major is focused on improving its annual results by targeting sharply on the notable U.S. market, which is currently progressing with a significant housing market recovery, compared to its competitors.
Sherwin-Williams presently carries a Zacks Rank #3 (Hold) owing to the negative impact of the Comex paint stores acquisition which is estimated to decline the earnings per share by 28 cents during 2014. Other better-ranked companies worth investing in the basic materials segment include Celanese Corporation with a Zacks Rank #2 (Buy), Valhi, Inc. and Innospec Inc. each carrying a Zacks Rank #1 (Strong Buy).
Credit Suisse (CS, Financial) analysts raised the price target on shares of Sherwin-Williams Co. to $260 from $240 and maintained an outperform rating for the stock.
John McNulty believes Sherwin to be a lucrative stock currently with the planned contract win with Lowe’s Companies. Moreover, the strategic forecasted launch of the HGTV HOME brand at Lowe’s is estimated to widen the company’s market share by focusing on the key DIY market.
Conclusion
Overall, the investors are advised to invest into The Sherwin-Williams Company looking at the logical company valuations with the trailing P/E and forward P/E ratios of 32.67 and 22.22 respectively. But the stock is costlier compared to the industry’s average P/E of 19.84. The PEG ratio of 1.61 is comparable to the industry’s average of 1.50 and depicts similar cost of growth. The profit margin of 7.78% indicates satisfactory company profits. However, Sherwin-Williams need to optimize its debt-laden balance sheet with huge total debt of $1.81 billion against weak total cash of $40.73 million only, restricting the company to plan for future growth investments.
