Sherwin-Williams in a Positive Tone - Analyst Blog

Sherwin-Williams Co. (SHW) reported net earnings of 67 cents per share in the fourth quarter of 2010, up 15.5% from 58 cents per share in the year-ago period and up 3.1% from the Zacks Consensus Estimate of 65 cents.

Reported net income per share were reduced by trademark and long-lived asset impairment charges of 4 cents per share and another 4 cents per share charges in relation to the repurchase of long-term debt, partly offset by a favorable impact of 4 cents per share associated with the disposition of closed manufacturing sites.

Net sales for the quarter increased 18.6% year over year to $1.90 billion driven by higher paint sales volume, acquisitions, selling price increases and favorable currency translation rates. Sherwin-Williams' fourth quarter sales also exceeded the Zacks Revenue Estimate of $1.78 billion.

Performance by Segment

The Paint Stores Group posted net sales of $999.3 million, up 8.6% from $920.2 million in the year-ago period. The improvement was largely attributed to selling price increases and expanding domestic architectural paint sales to residential repaint contractors and DIY customers.

Segment profit increased 12.4% year over year to $134.8 million driven by selling price increases, reduced asset impairment charges, and paint sales volume gains partially offset by raw material cost increases and rise in selling, general and administrative expenses.

Net sales of the Consumer Group improved 6.2% from the same period last year to $255.0 million led by improved demand at some of the segment's retail, industrial and institutional customers. Segment profit rose to $26.1 million from $4.6 million in the fourth quarter of 2009 mainly because of the cost saving initiatives undertaken by the company.

Net sales of the Global Finishes Group rose 46.4% to $640.1 million in the quarter as a result of suitable acquisitions, higher paint sales volume and selling price increases. The segment's profit was $28.8 million versus a loss of $1.1 million recorded during the corresponding quarter of 2009. The progress was derived from reduced asset impairment charges, increased paint sales volume and selling price increases, partly offset by dilution from acquisitions.

Full Year 2010 Summary

Net earnings for the full year rose 11.4%, from $3.78 per share to $4.21 per share. Net earnings were reduced by 4 cents per share trademark and asset impairment charges, 12 cents charges associated with the repurchase of long-term debt along with a favorable impact of 4 cents in relation to the disposition of closed manufacturing sites. The full year per share earnings missed the Zacks Consensus Estimate of $4.38.

Full-year net sales were $7.78 billion, up 9.6% from last year's $7.09 billion. The full year sales were also higher than the Zacks Revenue Estimate of $7.66 billion.

Financial Position

Sherwin-Williams had cash of $58.6 million as of December 31, 2010, compared with $69.3 million as of December 31, 2009. During the fourth quarter, the company acquired 1.53 million shares of its common stock through open market purchases bringing its total purchase to 5 million shares in the year. As of December 31, 2010, Sherwin-Williams had remaining authorization of 5.75 million shares under the share repurchase program.

Outlook

Management projects net sales for the first quarter of 2011 to be in the mid to high teens and net earnings in the range of 48 cents to 58 cents per share, incorporating the demand scenario in the end markets and the effects of rising raw material costs.

For the full year 2011, management expects net sales to increase above 2010 levels by a high single digit percentage. Alongside, the company anticipates full year 2011 net earnings to be in the range of $4.65 to $5.05 per share.

Our Take

Each of the business divisions of Sherwin-Williams has reaped benefits and will continue to do so, backed by the improving domestic and international markets, rising product prices, successful acquisitions along with the company's cost reduction efforts.

However, higher raw material prices and increase in administrative expenses may wipe out a large portion of the benefits derived. In view of the above conditions, we recommend the shares of Sherwin-Williams Co.as Hold (Zacks #3 Rank) in the short term and “Neutral” in the long term.

 

Overview

 

Based in Cleveland, Ohio, Sherwin-Williamsis a developer, manufacturer, distributor, and seller of paints, coatings, industrial and marine products, original equipment manufacturer product finishes and related items, and automotive finishes and refinish products in North and South America, Europe, and Asia. The company's key competitors include PPG Industries Inc. (PPG), The Valspar Corporation (VAL) and Air Products and Chemicals Inc. (APD).

 
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