Sherwin-Williams Company (SHW) posted net earnings of $1.60 per share in the third quarter of 2010, up 6% from $1.51 per share in the year-ago period. Reported earnings fell short of the Zacks Consensus Estimate of $1.68. Quarterly revenues, however, climbed 8.8% year over year to $2.2 billion, in line with the Zacks Consensus Estimate.
Segment Review
In the Paint Stores Group segment, net sales inched up 5.4% to $1.3 billion in the quarter with higher selling prices and volumes of architectural paint, primarily due to domestic residential repaint contractors and do-it-yourself customers.
However, higher raw material and selling and administrative costs are eating up the profits of the segment. The segment’s profit declined 2.2% to $225.1 million in the quarter .Operating margins were 17.5% versus last year’s 18.9%.
Net sales in the Consumer Group segment improved 9% year over year to $340.4 million on higher demand from the retail, industrial and institutional customers. Higher revenues and cost synergies helped a 5% rise in operating income to $59.7 million. Operating margins came in at 17.5%, slightly higher than 17.1% in the year-ago period.
Net sales of the Global Finishes Group rose 22.6% to $544.5 million in the quarter, which was primarily driven by acquisitions (15.1%) and favorable currency impact (2.5%). The segment’s profit improved 7% to $32 million, leading to operating margins of 5.9%. Operating margins were 6.7% for the corresponding quarter of the previous year.
Sherwin-Williams has been using cash strategically. The company repurchased 1.13 million shares in the reported quarter of 2010 and had an unutilized authorization to buy 7.28 million shares at the end of the quarter.
Outlook
Sherwin-Williams completed the Becker Acroma acquisition in the reported quarter. Sherwin expects the acquisition to be accretive to earnings in the long term. The company hopes that the acquisition would strengthen its position internationally.
Fourth quarter 2010 net earnings are expected in the range of 59 cents to 69 cents; lower than last year’s 58 cents. For the full year 2010, net earnings are likely to be about $4.12 to $4.22 per share, higher than the earnings of $3.78 in 2009.
In July, the company had projected earnings of $4.12 to $4.52 per share for 2010. Net sales are expected to grow in single digits, year over year.
However, higher raw material costs and volatile end-market scenario are the chief concerns. For the fourth quarter of 2010, the company expects a modest increase in sales emanating from acquisitions.
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. 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 strong cash flow to support growth opportunities.
Until then, we reiterate a long-term (6 months and higher) Neutral recommendation on Sherwin-Williams. 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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