We reiterate our Neutral recommendation on Cleveland, Ohio based Sherwin-Williams Company (SHW), a company engaged in manufacturing and sale of paints, coatings and related products, primarily in the North and South America.
Sherwin-Williams Consumer segment is recovering thanks to improving domestic and international sales of automotive finishes, original equipment manufacturers’ product finishes, and protective and marine coatings. The Paint segment has also seen some rebound with a favorable mix reversion to professional contractors from the do-it-yourself channel. The company is focused on capturing a larger share of its end-markets, as is evident in the increasing number of stores.
In the first half of 2010, Sherwin-Williams opened about 13 new stores and consolidated seven redundant stores in the Paint segment. For the full year, the company plans to open about 40 to 50 new stores. Over the last two and half years, Sherwin-Williams has added about 35 stores. Although the company has made modest revenue and earnings forecasts for the upcoming quarter, full year results are expected to be healthier with about a 10% to 20% rise in net income. We expect Sherwin-Williams to report in line in the upcoming quarter as well as for 2010.
About 15% of Sherwin-Williams’ net revenues come from the foreign markets. We are positive on its Brazilian operations, which is the company’s largest foreign market. Recently, Sherwin-Williams has acquired two Europe-based companies: Becker Industrial Products and Arch Chemical’s Industrial Wood Coatings business, both under the Global Finishes Group segment. Such acquisitions will undoubtedly consolidate the company’s position in the kitchen cabinet, furniture and flooring end-markets.
However, Sherwin-Williams faces a very difficult housing environment. Weak end-markets and higher raw material costs pressure revenues and margins. The company is also experiencing higher raw material costs, primarily acrylic latex and titanium dioxide in the Consumer group segment that buys raw materials for the company.
Furthermore, Sherwin-Williams Security Coating Systems business unit develops new coating technologies that provide detection, mitigation and protection and critical infrastructure from threats arising from accidental or intentional explosions under Life Shield Engineered Systems, LLC. The new technologies create a potentially higher level of product liability for Sherwin-Williams than what is normally associated with coatings and related products. This negatively affects the company’s profitability to an extent.
Over the last five years, Sherwin-Williams shares have traded in a range of 10.1x to 19.7x trailing 12-month earnings. The stock is trading at a premium to the industry average, based on forward earnings estimates. At a 7% premium to the industry average for 2010, the P/E is at the upper-end of the historical range.
Our long-term Neutral recommendation on the stock indicates that it would perform in line with the market. Our $77.00 target price, 16.8x 2010 EPS, reflects this view.
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