Current price: $635 Price target: $660
Position size: 3.7% TTM Performance: 25%
Key Takeaways:
· SHW reported better than expected revenues and EPS and increased guidance. Sales down 5.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -8%.
· Big GM expansion (>300bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down mid-single-digit for the year compared to prior estimate of down LSD. Driven by lower resins and solvents.
· Sequential improvement in demand across all end markets. Industrial end markets remain the weakest.
· DIY business is strong: Surge in DIY (up double digits) demand across all channels, especially Home Improvement retail. Should switch back to DIFM – contractors seeing increased bids, including increased demand for interior projects.
Additional Highlights:
· Sequential improvement: sales were down by a mid-teens percentage in April, but came out of the quarter with June flat to last year.
· DIY business growing at an “unprecedented pace” and was robust throughout the quarter. After DIY new residential, and residential repaint were the best performers in the quarter. Both recovered to deliver positive growth in June.
· From a product perspective exterior paint is recovering faster than interior paint due to social distancing requirements. Exterior paint sales increased by mid-single digit percentage in the quarter.
· Input costs were down MSD in 1H and expected to be down the same in 2H. This along w/ 2% pricing taken in the beginning of the year benefited margins. Raw materials costs are key as they represent ~80% of COGS for paint.
· Multiple signs of health in residential end markets. Contractors are seeing requests for quotes in June above June 2019 levels. Spray equipment pump sales (a good indicator of future demand) were down mid-single digits in the quarter but recovered to finish strong in the month of June.
· America’s Group:
o Same store sales decreased 6.9%. Strong DIY growth (up double digits) offset by soft residential and commercial end markets.
o Sales improved sequentially through the quarter, driven by recovery in new residential and residential repaint which both delivered positive growth in June.
o Segment margin increased 160 basis points to 23.8%
o Largest sales decrease in Eastern division, followed by Canadian, Midwestern, South Western and Southeastern divisions.
· Consumer Brands Group:
o Sales increased 22% driven by strong North American DIY demand throughout the quarter. Strong growth across entire retail channel. Solid growth in Europe; China and Australia soft.
o Adjusted segment margin increased by 620bps. Margin improvement driven by volume leverage, lower input costs and good spending controls, as well as actions taken over the past year to improve international operating margins.
· The Performance Coatings Group:
o Sales decreased 16.5% (-3% impact from FX). Saw sequential improvement throughout the quarter. Packaging remained strong, up high-single-digits. Coil, Industrial Wood, General Industrial and Automotive Refinish demand negatively impacted by COVID-19 pandemic. Auto is tied to miles driven (auto refinish) and not car sales as they’re not exposed to OEM auto. General industrial weak but improving.
o Sales decreased across all regions: low-single-digit declines in Asia, all other regions down by double-digit percentages.
o Adjusted segment margin contracted by 190bps.
· Guidance:
· Sales: flat YoY (reflecting uncertainties of the timing and pace of improvement in the U.S. and global environments). By segment:
o TAG: Flat to up low-single-digits (previously Flat to down mid-single-digits)
o CBG: Up high-single-digits (previously +/- low single digits)
o PCG: Down low to mid-single-digits (previously down high-single-digits to low-double-digits)
· Adjusted earnings per share: $21.75-$23.25
· Raw materials: down mid-single-digits (previously down low-single-digits)
· Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.
· Capital allocation: recently increased dividend by 19%, share repurchases on hold, reduced capex.
· Decreased leverage ratio from 3.2x to 2.8x. No near term debt maturities until 2022 ($660m).
· Reasonable valuation, trading at ~3.5% FCF yield.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$SHW.US
[category earnings]
[tag SHW]