Longbow Research upgraded shares of Sherwin-Williams Co SHW and set a price target at $400, representing a 15-percent upside from current levels.
Analyst Dmitry Silversteyn hinged his expectations for a 15 percent upside on improving same store volume growth comps, The Valspar Corp VAL deal integration and accretion, and possible margin upside from price increases and/or reversal of raw material inflation trends in 2018. The analyst expects the improving comps and higher prices to bridge the gap to 2018.
"VAL deal accretion and a potential decline in raw material costs can result in positive earnings surprises and upward earnings revisions leading to preservation, if not expansion, of SHW's valuation multiples and thus higher share prices," the analyst clarified.
Comps On The Mend
Longbow, quoting its contacts, said company-owned stores saw acceleration of paint demand in late May to early June. Among the categories, the firm noted that demand for exterior applications improved, as rainy weather abated, sending contractors scurrying to clear project backlogs.
Therefore, the firm noted that the same-store comps were trending higher, relative to earlier expectations.
DIY Doing It For Sherwin-Williams
The DIY channel, which was worse hit than the contractor segment, is seeing a change in buying patterns, the firm noted. According to the firm, the DIY channel is seeing growing customer preference for mid-grade paint products that can benefit PPG Industries, Inc. PPG and HGTV brands within Home Depot Inc HD and Lowe's Companies, Inc. LOW.
The firm feels this would help improve volume comps for PPG's Architectural Paint SBU and Sherwin-Williams' consumer group in the second quarter of 2017 and beyond (check out analyst Dmitry Silversteyn's track record).
Adjusting Estimates And Upgrading Rating
The firm lowered its second-quarter 2017 and 2017 earnings per share estimates to $4.33 and $13.51, respectively, from $4.64 and $14.33 to reflect the initial dilution of the Valspar acquisition. On the other hand, the firm raised its 2018 earnings per share estimate to $17 from $16.51 on Valspar accretion.
As such, Longbow upgraded shares of Sherwin-Williams from Neutral to Buy while setting a price target of $400. The firm believes the stock would hit the price target in the next nine to 12 months.
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