Paint producer Sherwin-Williams Company (SHW) posted net earnings of $1.64 per share in the second quarter of 2010, up 21.5% from $1.35 per share in the year-ago period. Adjusting for a one-time debt repurchase charge of 8 cents, the company earned $1.72 per share, beating the Zacks Consensus Estimate of $1.64.
Quarterly revenues climbed 10% year over year to $2.1 billion, outpacing the Zacks Consensus Estimate of $2 billion. The growth revenues came from higher sales across all major segments. Favorable currency impact further aided growth.
Segment Review
In the Paint Stores Group segment, net sales inched up 6.4% to $1.245 billion in the quarter with higher sales of architectural paint primarily to domestic residential repaint contractors and improving industrial maintenance product sales. Improving revenues translated into operating income of $193.5 million, reversing operating losses of $18.5 million in the second quarter of 2009. Higher raw material and selling and administrative costs are eating up the profits of the segment. Operating margins were 17% versus last year’s 16.5%.
Net sales in the Consumer Group segment jumped 11.9% year-over-year to $410.2 million on higher demand from the retail, industrial and institutional customers. Higher revenues and cost synergies helped a 22% rise in operating income to $80.7 million. Operating margins came in at 19.7%, higher than 18% in the year-ago period.
Net sales of the Global Finishes Group rose 18.8% to $486.5 million in the quarter, which was primarily driven by acquisitions (9.2%) and favorable currency impacts (5%) and higher volumes in the paint business (4.6%). The segment’s profit improved 28% to $40 million, leading to operating margins of 8.2%. Operating margins were 7.6% for the corresponding quarter of the previous year.
Sherwin-Williams has been using cash strategically. The company repurchased 1.95 million shares in the reported quarter of 2010 and had an unutilized authorization to buy 8.4 million shares at the end of the quarter.
Outlook
Sherwin-Williams remain uncertain about the demand in the end markets. However, the company anticipates sales to increase modestly in the upcoming quarter. The company anticipates third quarter earnings to be in the range of $1.55 to $1.70 per share. Sherwin-Williams had reported earnings of $1.51 per share in 2009.
For the full year 2010, the company is expecting net income of $4.12 to $4.52 per share, higher than $3.78 per share earned in 2009. The Zacks Consensus Estimate is pegged at $1.75 and 44.58 per share for the third quarter and full year 2010, respectively.
Zacks Recommendation
Sherwin Williams, along with other industrial peers including Valspar Corporation (VAL) and Air Products and Chemicals Inc. (APD) faces a tough housing environment. A majority of the company’s business comes from the construction markets. Without any identified catalyst for top-line improvement in the near term, we do not expect any significant recovery until well into 2010.
However, we expect architectural coatings volume to recover in 2010. Aggressive efforts for tighter cost controls, working capital reductions, supply chain optimization and productivity improvement should continue yielding margin benefits. We expect a strong cash flow to support growth opportunities.
Until then, we reiterate a long-term (6 months and higher) Neutral recommendation on Sherwin-Williams, supported by a Zacks #3 Rank (Hold). We expect the stock to perform in-line with the overall U.S. equity market over the next six to twelve months. We advise investors to retain the stock over the time period.
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