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The Science of Hitting
The Science of Hitting
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Sherwin-Williams Company: Q3 2011

October 26, 2011 | About:

The Sherwin-Williams Company (NYSE:SHW), which was founded in 1866 and develops, manufactures, distributes and sells paints and coatings primarily in North and South America, reported third quarter 2011 results on Tuesday. Here are some of the highlights from the conference call and the press release:

Sales in the third quarter increased 14.4% from a year ago to $2.48 billion, the largest quarterly sales figure in the company’s 145 year history; this increase was driven primarily by selling price increases, but also by acquisitions (4.1%), favorable currency effects (1%), and improved organic volume growth. Sales for the first nine months of the year also reached a new high, climbing nearly 14% to $6.7 billion compared to the first three quarters of 2010.

Net sales in the Paint Stores Group increased 10.2% in the quarter to $1.42 billion (comparable sales up 8.2%, and up in all four geographic Paint Stores divisions), and 7.8% year to date (6.8% increase in comparable sales); the remainder of the increase came from new stores, with 13 added in the quarter and 31 year to date. Segment profit increased 5.2% in the quarter to $236.9 million and 5.7% year to date ($512.4 million), decreasing as a percentage of sales in both periods due to higher raw material costs and higher SG&A.

Net sales in the Consumer Group increased 3.3% to $351.6 million in the quarter, but declined 2% year to date due to the elimination of a paint program with a large retail customer earlier in the year. Segment profit has declined in both the quarter (to $41 million from $59.7 million in Q3 2010) and year to date (to $143.5 million from $177.9 million) due to increasing raw material costs.

Net sales in the Finishes Group increased 31.2% to $714.4 million in the quarter and 39.3% (to $2.02 billion) year to date, with acquisitions accounting for roughly half of the quarterly increase (16.3%) and strategic investments outside the U.S. “bearing fruit”. Segment operating profit increased 36.3% in the quarter due to a combination of higher volume and pricing plus currency benefits ($3.6 million).

While gross profit dollars increased by $66.7 million to just over $1 billion, gross margins as a percentage of sales decreased 290 basis points to 41.8%, a trend of cost inflation pressure that will continue into Q4 (“Our disappointment in the quarter is that we're still being impacted by the rapid increase in raw material costs. The recent decline in petrochemical feedstock’s, such as propylene, will provide some cost relief in the coming quarters. However, the pricing actions by the titanium dioxide producers are likely to continue for the balance of the year and in to 2012.”).

Diluted EPS in the quarter increased 6.9% to $1.71 (a record) from $1.60 in the third quarter of 2010; through the first nine months, diluted EPS is equal to $3.98 per share, an increase of 12.7% compared to the first three quarters of 2010 ($3.53).

In regards to guidance, here is what Chairman and CEO Chris Connor had to say:

“For the fourth quarter, we anticipate our consolidated net sales will increase six to ten percent compared to last year’s fourth quarter. We expect diluted net income per common share for the fourth quarter to be in the range of $(.05) to $.15 per share, including the one-time charge of $.72 per share relating to the IRS settlement, compared to $.67 per share in 2010.

For the full year 2011, we expect consolidated net sales to increase above 2010 levels by a low teen percentage. With annual sales at that level, we are reaffirming our full year guidance for diluted net income per common share for 2011 at $4.65 to $4.85 per share before the IRS settlement [from an audit of the company’s employee stock option plan from years 2003-2009] and in the range of $3.93 to $4.13 per share due to the settlement, compared to $4.21 per share earned in 2010.”

At the close, the stock was down around 1.5%, compared to a 1% gain for the S&P 500; the current share price implies an earnings multiple of 16.87 off the top end of the company’s forecast (not including IRS settlement).

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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