The Sherwin-Williams Company (NYSE: SHW)

Transcription

1 Apr 25, 2016 The Sherwin-Williams Company (NYSE: SHW) $ USD ( As of 04/22/16 ) Zacks Rank 3-Hold Style:Value: Growth: Momentum: VGM: Data Overview 52 Week High-Low $ $ Day Average Volume 743,234 Beta 0.87 Market Cap B Dividend / Div Yld $3.36 / 1.12% Industry PAINTS&REL PRDS Industry Rank 223 / 265 (Bottom 16%) Current Ratio 1.28 Debt/Capital 65.60% Net Margin 9.33% Price/Book (P/B) Price/Cash Flow (P/CF) Summary Sherwin-Williams adjusted earnings and sales for first-quarter 2016 topped Zacks Consensus Estimates. Revenues rose year over year as higher paints sales volumes more than offset unfavorable currency impact. The company raised its full-year earnings guidance. Sherwin-Williams aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits. Moreover, the acquisition of Valspar will allow the company to strengthen its position as a leading paints and coatings provider globally. However, Sherwin-Williams' Latin American operation remains exposed to currency headwinds and soft end-market demand. Demand for architectural paint remains weak outside North America due to sluggish market conditions and currency headwinds. Elements of the Zacks Rank Agreement Estimate Revisions (60 days) Earnings Yield 4.24% Debt/Equity % 67% 67% 50% Value Score P/E (F1) P/E (F1) Rel to Industry PEG Ratio 1.19 Q1 (Current Qtr) Revisions: 3 Up: 3 Down: 0 Q2 (Next Qtr) Revisions: 3 Up: 2 Down: 1 F1 (Current Year) Revisions: 3 Up: 2 Down: 1 F2 (Next Year) Revisions: 4 Up: 2 Down: 2 P/S (F1) 2.34 P/S (TTM) 2.41 Magnitude Consensus Estimate Trend (60 days) P/CFO P/CFO Rel to Industry 1.94 EV/EDITDA Annual Growth Score Current Current Current Current Proj. EPS Growth (3-5 yrs) 15.52% Q % Q % F % F2 0% Hist. EPS Growth (Q0/Q-1) 3.46 Qtr CFO Growth Upside Zacks Consensus Estimate vs. Most Accurate Estimate 2 Yr CFO Growth Return on Equity (ROE) % NI - CFO / Total Assets Asset Turnover 1.90 Momentum Score Most Accurate: 4.21 Zacks Consensus: 4.18 Q1 0.72% Most Accurate: 4.40 Zacks Consensus: 4.40 Q2 0.00% Most Accurate: Zacks Consensus: F1 0.48% Most Accurate: Zacks Consensus: F2-0.29% 1 week Volume change % 1 week Price Cng Rel to Industry -0.40% Surprise Reported Earnings History (F1) EPS Est 1 week change 1.28% (F1) EPS Est 4 week change 1.28% (F1) EPS Est 12 week change -0.43% (Q1) EPS Est 1 week change 0.86% Reported: 1.81 Estimate: 1.63 Reported: 2.12 Estimate: 1.90 Reported: 3.97 Estimate: 3.89 Reported: 3.77 Estimate: 3.82 Average 4 Qtr Surprise Q End 03/16 Q End 12/15 Q End 09/15 Q End 06/ Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 Chicago, IL 60606

2 The data on the front page and all the charts in the report represent market data as of 04/22/16, while the reports text is as of 04/25/2016 Overview Founded in 1866 and headquartered in Cleveland, Ohio, The Sherwin-Williams Company is into manufacturing and sales of paints, coatings and related products, primarily in the North and South America. The company also has operations in the Caribbean region, Europe and Asia. Sherwin runs its business under four broad heads - Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. The Paint Stores Group: This segment sells Sherwin- Williams branded architectural paints and coatings, industrial and marine products, and original equipment manufacturer product finishes items produced by the other two segments i.e. Consumer Group and Global Finishes Group segments. The Consumer Group: This segment manufactures paints, coatings and related products and sells them primarily in the U.S. and Canada. It also sells paints to the Paint Stores Group. The Group operates 34 manufacturing plants and 10 distribution centers. The segment supplies products to many retail paint and coatings outlets in the U.S. The Consumer Group s products are sold under brands such as Cuprinol, Krylon paints, Purdy paints, Minwax, Dutch Boy, Pratt & Lambert paints, Thompson s WaterSeal wood sealers and Dupli-Color automotive specialty products. The Global Finishes Group: This segment manufactures and sells protective and marine products, refinish products and automotive finishes, and original equipment manufacturer coatings and related products. These products are primarily sold in the markets of North and South America, Europe and Asia. The segment also licenses certain technologies and trade names worldwide, besides distributing Sherwin-Williams branded products through a network of 303 branches. The Latin America Coatings Group: Sherwin-Williams decided to report the Latin America Coatings Group as a separate segment from the fourth quarter of The segment manufactures and sells a variety of architectural paint and coatings, protective and marine products, OEM product finishes and related products in North and South America. Zacks Equity Research: SHW Page 2 of 8

3 Reasons To Buy: Sherwin-Williams philosophy is to diversify its customer base and expand its operations into various geographies. The company follows a method of growing through acquisitions and also through internal initiatives such as efficient working capital management and innovation. This enables the company to somewhat reduce its dependency upon prevailing market conditions. Sherwin-Williams, in Sep 2013, completed its takeover of the U.S. and Canadian businesses of Comex for $90 million in cash and assumed liability of around $75 million. The acquisition has ushered in significant opportunity for Sherwin-Williams. The buyout is a strategic fit for the company and will enable it to better serve its customers across some of its key markets. Sherwin-Williams is making good progress in integrating the acquired business. Moreover, in a big move, the company recently agreed to buy rival paints maker Valspar for roughly $11.3 billion. The acquisition will allow Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies. Valspar is a strategic fit and the merger will extend Sherwin-Williams brand portfolio and customer relationships in North America, and bolster its global finishes business. In addition to expanding Sherwin-Williams global platform in Asia-Pacific and Europe, the Middle East and Africa (EMEA) regions (where Valspar has a significant presence), the transaction will also add new capabilities in the packaging and coil segments. The buyout of Valspar will also significantly enhance Sherwin-Williams competitive profile. Sherwin-Williams aggressive cost control initiatives, working capital reductions and productivity improvement should yield margin benefits. Moreover, the Valspar acquisition will expand its global platform in Asia- Pacific and EMEA. Sherwin-Williams Consumer segment is recovering with improving domestic and international sales of automotive finishes, original equipment manufacturers product finishes, and protective and marine coatings. The Paint segment has also seen a 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. Further, demand for paint and coatings looks promising in 2016, supported by growth in residential startups and existing home projects. The company added 95 stores during 2014 and 83 net new stores in 2015 to its Paint Stores Group unit, and currently has 4,099 stores in operation. Plans are in place to add net new stores in The company also launched its HGTV HOME Paints at Lowe s personal stores. Given that Lowe s is well recognized by homeowners in the global home remodeling space, the collaboration with Lowe s should prove beneficial for Sherwin-Williams HGTV HOME solutions. Sherwin-Williams aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits. The company s working capital ratio dropped to 8.6% of sales at the end of 2015 from 10.1% a year ago. Robust working capital management helped the company to generate healthy cash from operations of $1.45 billion in Sherwin-Williams is also using its cash strategically. The company returned over $1.28 billion to its shareholders in 2015 through dividends and share repurchases. The company repurchased 3.58 million shares in 2015 and currently has remaining authorization to purchase million shares. Also, Sherwin-Williams remains committed to increase dividend payouts as it has raised its quarterly dividend by 25% to $0.84 per share. Sherwin-Williams is implementing effective pricing strategies to offset currency headwinds. The company continues to expect incremental benefits from pricing, which may contribute to improvement in gross margin. Moreover, with continued fall in the price of crude oil, Sherwin-Williams expects to see lower year-over-year input costs in Sherwin-Williams anticipates average yearover-year raw material cost for the paint and coatings industry to be down in the mid-single digit range in Reasons To Sell: Sherwin-Williams consumer and paint stores businesses still remain impacted by the global economic weakness. Although domestic demand of architectural paint has improved, it remains weak outside North America due to sluggish market conditions and currency headwinds, mainly in Europe and the Latin American countries. Moreover, a material recovery is not expected in the non-residential construction market in the near term. Sherwin-Williams' Latin American operation remains exposed to currency headwinds and soft end-market demand. The company is also faced with volatility in raw material costs. Sherwin-Williams Latin American operations are facing soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar). Currency translation reduced sales from the company s Latin American operations by roughly 22% in the most recent quarter. Sherwin-Williams is expected to continue facing currency headwinds and soft demand in its Latin American markets in the near term. Sherwin-Williams still remains exposed to volatility in raw material costs, primarily for acrylic latex, propylene and titanium dioxide/tio2 (a key paint pigment). While the company expects raw materials costs to fall in 2016, the tailwind is expected to be less strong than what was witnessed in Last Earnings Report Sherwin-Williams Beats on Earnings in Q1, Ups View Sherwin-Williams earnings (excluding acquisition costs of $0.24 per share) surged 31.2% Quarter Ending 03/2016 Report Date Apr 21, 2016 Zacks Equity Research: SHW Page 3 of 8

4 to a record $1.81 per share in the first quarter of 2016 from $1.38 recorded a year ago, mainly on improved operating results in the Paint Stores Group. Earnings also outpaced the Zacks Consensus Estimate of $1.63. Reported earnings climbed to $1.57 per share from $1.38 per share a year ago. Currency swings affected earnings by $0.06 per share. Sales Surprise 3.88% EPS Surprise 11.04% Quarterly EPS 1.81 Annual EPS (TTM) Sherwin-Williams recorded net sales of around $2,574 million in the first quarter, marking a 5.1% year-over-year rise. Revenues surpassed the Zacks Consensus Estimate of $2,478 million. Increased paint sales volumes in Sherwin-Williams Paint Stores and Consumer Groups led to higher sales in the quarter, partly offset by unfavorable currency translation. Currency swings had an unfavorable impact of 2.8% on consolidated net sales. Segment Review The Paint Stores Group unit registered net sales of $1.62 billion in the reported quarter, up 10.5% year over year. The improvement was driven by increased architectural paint sales volume across all end markets. Net store sales from stores open for more than 12 calendar months rose 9.4% from the prior-year quarter. Sherwin-Williams added 13 net new locations in its Paint Stores Group in the quarter. Net sales of the Consumer Group unit rose 7.5% to $378.1 million mainly due to the sale of HGTV HOME products by Sherwin-Williams to Lowe's stores. The segment s profits were driven by improved operating efficiencies and higher volume sales. Net sales from the Global Finishes Group segment fell 3.3% to $454.2 million in the quarter, mainly due to unfavorable currency impact that hurt sales by 4.7%. Segment profits improved year over year owing to a fall in costs of raw materials and cost-control initiatives, which were partly offset by unfavorable currency translations. Latin America Coatings Group s net sales declined 24.7% to $125.2 million, primarily due to unfavorable currency translation and less volume, partly mitigated by a higher selling price. Unfavorable currency translation affected sales by 22.2% in the quarter. Segment profit decreased owing to increasing raw material costs and an unfavorable currency translation rate. Financials and Shareholder Returns Sherwin-Williams made no open market purchases of its common stock in the reported quarter. At the quarter s end, the company had remaining authorization to purchase million shares of its common stock through open market purchases. Outlook Sherwin-Williams expects consolidated net sales to increase a low-to-mid single-digit percentage in second-quarter 2016 from second quarter The company forecasts net income in the second quarter, excluding acquisition costs, in the range of $3.95 to $4.15 per share. Costs related to the proposed acquisition of Valspar are projected to hurt net income per share by about $0.15 in the second quarter. For 2016, Sherwin-Williams expects consolidated net sales to increase by a low single-digit clip from The company raised its fullyear earnings guidance and expects earnings, excluding acquisition costs, in the range of $12.50 to $12.70 per share (up from $12.20 $12.40 per share expected earlier). It expects costs related to the planned acquisition of Valspar to be in the range of $185 million to $205 million this year. Recent News Sherwin-Williams and Valspar in $11.3B Paint Merger - Mar 20, 2016 Sherwin-Williams has agreed to buy rival paints maker Valspar in an all-cash transaction that would create a premier global paints and coatings company with strong foothold across Asia-Pacific and EMEA regions. Under the definitive deal, Sherwin-Williams is buying Valspar for roughly $11.3 billion or $113 per share, representing roughly 35% premium to Valspar s closing price on Mar 18. The deal value includes assumption of roughly $2 billion of Valspar debt. The deal, which has been cleared by boards of both companies, is expected to consummate by the end of first-quarter The transaction is subject to the approval of Valspar shareholders and other closing conditions including the U.S. antitrust clearance and regulatory approvals in other jurisdictions. The companies expect that no or minimal divestitures should be required to complete the transaction given the benefits it will offer to customers (including enhanced product range) and its complementary nature. Should the required divestitures of businesses total more than $650 million of Valspar's revenues for 2015, which both companies believe to be the unlikely event, the transaction price would be adjusted to $105 in cash per Valspar share. Sherwin-Williams have the rights to terminate the deal in the event that required divestitures exceed $1.5 billion in 2015 revenues. Zacks Equity Research: SHW Page 4 of 8

5 Sherwin-Williams plans to fund the deal through a combination of cash on hand, liquidity available under existing facilities and new debt. The company has secured committed bridge financing from Citigroup Global Markets Inc. for the transaction. The integrated company will have pro forma 2015 revenues and adjusted EBITDA (including estimated annual synergies) of roughly $15.6 billion and $2.8 billion, respectively. Sherwin-Williams sees $280 million in annual synergies within two years following the closure of the deal and expects the transaction to be immediately accretive to its earnings (barring one-time costs) and significantly enhance its cash flows. Sherwin-Williams Raises Dividend - Feb 17, 2016 Sherwin-Williams' board has announced a regular quarterly dividend of $0.84 per share, a 25% increase over the $0.67 per share paid in the same quarter in Zacks Equity Research: SHW Page 5 of 8

6 Industry Analysis Zacks Industry Rank: 223 / 265 (Bottom 16%) Top Peers AAON INC (AAON) AEGION CORP (AEGN) ANHUI CONCH CEM (AHCHY) ASPEN AEROGELS (ASPN) ARMSTRONG WORLD (AWI) ACUITY BRANDS (AYI) BOISE CASCADE (BCC) RPM INTL INC (RPM) VALSPAR CORP (VAL) Industry Comparison Paints&rel Prds Position in Industry: 1 of 0 Industry Peers SHW Market Cap B # of Analysts 13 Dividend Yield 1.19% Growth Score Hist. EPS Growth (3-5 yrs) 15.52% Proj. EPS Growth (F1/F0) 12.90% Curr. Cash Flow Growth 17.62% Hist. Cash Flow Growth (3-5 yrs) 13.43% Current Ratio 1.28 Debt/Capital 65.60% Net Margin 9.33% Return on Equity % Sales/Assets 1.90 Proj. Sales Growth (F1/F0) 2.77% Value Score Cash/Price EV/EBITDA PEG Ratio 1.19 Price/Book (P/B) Price/Cash Flow (P/CF) P/E (F1) Price/Sales (P/S) 2.34 Earnings Yield 4.24% Debt/Equity 1.91 Cash Flow ($/share) Momentum Score Daily Price Chg -0.88% 1 Week Price Chg -0.40% 4 Week Price Chg 5.69% 12 Week Price Chg 19.11% 52 Week Price Chg 5.32% 20 Day Average Volume 743,234 (F1) EPS Est Wkly Chg 1.28% (F1) EPS Est Mthly Chg 1.28% (F1) EPS Est Qtrly Chg -0.43% (Q1) EPS Est Mthly Chg -2.00% X Industry S&P M B % 1.75% % 8.49% 5.16% 6.45% 10.59% 3.88% 13.43% 8.05% % 41.45% 8.16% 9.44% 42.94% 17.07% % 2.49% % 5.47% % -0.61% -0.40% 0.02% 3.26% 2.72% 24.15% 12.13% 4.69% -3.35% 743, % 0.00% 0.57% -0.77% -0.43% 0.84% -0.55% 0.00% AAON RPM VAL 1.43 B 6.73 B 8.46 B % 2.77% 1.55% % 4.94% 4.54% % 8.92% 5.82% 20.24% 5.16% 5.05% -1.57% 10.59% -0.33% 12.42% 9.82% 9.11% % 58.52% 66.65% 12.75% 6.93% 8.16% 25.40% 24.51% 42.94% % 4.67% 0.77% -0.52% -1.57% -0.24% -0.32% -0.28% -1.55% 0.26% 9.52% 0.82% 32.09% 31.30% 39.93% 8.43% 4.07% 29.21% 193, , , % 0.00% 0.00% 0.00% 0.57% -0.30% 8.60% 0.57% -0.77% 0.00% 0.50% -0.55% Zacks Equity Research: SHW Page 6 of 8

7 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise. Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better. Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days. In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component. Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise. Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again. Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. Value Score Growth Score Momentum Score VGM Score As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B. Zacks Equity Research: SHW Page 7 of 8

8 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Zacks Equity Research: SHW Page 8 of 8