Sherwin-Williams (SHW) reported Q3 2017 results of $4.75, excluding one-time charges relating to the acquisition of Valspar. Results were ahead of street estimate of $4.68. SHW had strong same store growth of 5.2% driven by growth in sales and pricing. Lots of moving parts in the quarter given the Valspar merger, reordering of business into new segments and impact of hurricanes (-$.49 ). Overall organic growth was strong up 4.6%.
Current Price: $395 Price Target: $417
Position Size: 1.6% TTM Performance: (since 7/11/17): 12%
Segment results:
• Americas group (56% of sales) (basically paint – North America stores, Latin America, DIY, Residential, Commercial and Property management)
o Sales increased 6.5% on higher sales and price increases
o Margins fell from 21.8% to 20.7% due to higher raw material prices. SHW has historically a strong record of passing raw material price increases on to their consumers
• Consumer Brands Group (16% of sales) (Coatings and supplies)
o Sales were down 2.8% yoy with weakness in retail customers
o Margins decreased to 9.7% from 21.9% as the inclusion of Valspar had a significant effect on results
• Performance coatings (27% of sales) (Auto, Coil, Industrial and Marine)
o Sales up 5.8% with higher volume and prices
o Margins decreased from 13.7% to 4.8% with lots of noise from the acquisition
What we are watching:
• Solid same store growth was driven by professions who seem to be taking market share form retail customers
• Expect margins to rise as synergies are realized from merger
• US housing market remains robust
• Input cost of Titanium Dioxide and propylene have risen due to storm related disruptions and strong demand. Important to see SHW’s ability to pass on these costs to consumer
Outlook for the balance of the year:
• Expect sales to increase mid to high single digits
• Q4 EPS $1.97- 2.27 excluding a $.98 charge related to the acquisition
Thesis on SHW:
• Sherwin-Williams’ acquisition of Valspar creates a more diversified product portfolio, greater geographic reach, and is expected to be accretive to margins and EPS. The combined company is a premier global paint and coatings provider
• SHW is a high quality materials company leveraged to the U.S. housing market. Current macro and business factors are supportive of demand:
o High/growing U.S. home equity values. Home equity supportive of renovations
o Improving household formation rates off trough levels (aging millennials)
o Baby boomers increasingly preferring to hire professionals vs. DIY
o Solid job gains and low mortgage rates support homeownership
o Residential repainting makes up two thirds of paint volume. Homeowners view repainting as a low-cost, high-return way of increasing the value of their home, especially before putting it on the market