· At the end of last week they re-affirmed their 1Q guidance for sales growth of 2% to 5%.
· While they have experienced headwinds related to the coronavirus pandemic, it’s been primarily outside the U.S. Production operations in Asia are returning to pre-crisis levels. Across the US and Europe they have experienced minimal disruption to their supply chain and facility operations. At this time, the vast majority of their North American paint stores continue to operate and provide customers with multiple options for ordering and receiving product, including through their existing and extensive delivery system and store pick-up.
· They have large customers involved in mission critical applications such as food and beverage packaging, health care equipment and facilities, military equipment and energy infrastructure.
· The CEO said, “although near-term market conditions are likely to remain unpredictable, we believe our underlying long-term demand fundamentals remain intact.”
· Sherwin stands to benefit from the recent decline in oil prices (about 43% of Sherwin’s raw material costs are tied to petrochemicals including resins, solvents and packaging) and lower interest rates which aid housing market fundamentals. Certain raw material prices have increased related to lower Chinese production but these make up a smaller % of their raw material basket and China seems to be returning to pre-crisis production. Raw materials are ~80% of the cost of a coatings product.
· Valuation is not expensive at 5.5% TTM FCF.
· Balance sheet:
o Sherwin’s leverage ratio is 2.6x – their leverage ratio was elevated related to their Valspar acquisition. They have been working this down.
o Their debt is rated BBB and has not seen a big price decline relative to issues of similar credit quality.
o They have ~$400m in maturities this year which is manageable from their cash flow.
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
[tag SHW]
[category equity research]