Current price: $270 Price target: $330
Position size: 3% TTM Performance: 9%
Key Takeaways:
- Broad beat, demand trends are strong and they’re past the worst of supply chain issues. “We believe we are through the worst of the industry supply chain challenges and the incremental architectural capacity we added late last year positions us well for the upcoming architectural painting season.”
- Inflation – still elevated but they expect this to improve in the second half. They are taking price increases to offset and are prepared to take more if necessary. Higher labor costs for customers is causing a positive mix shift to higher quality paints which can reduce labor intensity of jobs (which is the largest portion of pro project costs).
- Taking action to offset headwinds which positions them to take share – Their actions are all aided by their scale & pricing power. Taking continued price increases, vertical acquisition (specialty polymers) that will aid supply, and they continue to invest in growth initiatives – “We’re leveraging all of our assets, including our store platform, our fleet, our distribution centers and more, to let us come up with unique and creative customer solutions that others simply can’t.”
- Margins will improve – as headwinds recede, strong demand and pricing actions will lead to higher margins
- Valuation is reasonable – current yr. FCF is depressed due to the raw material headwinds they are facing and investment in new capacity. As headwinds recede, margins will expand. Low-to mid-single digit top line growth and an improvement in margins toward long-term targets, yields ~25% upside.
- Balance sheet remains strong – leverage ratio is between 2-2.5x. Debt is 92% fixed rate.
- Strong history of returning capital to shareholders continues – In 2021, they increased their dividend over 20%, marking the 43rd consecutive year they increased their dividend.
Quotes from the call…
On demand:
- “Rising mortgage rates have not made an appreciable dent in the demand for our new residential customers to this point.”
- “I’d just highlight this article by USA Today that I think captures kind of the sentiment that we have in new residential. It talks about the housing unit shortfall… despite an annual average of 1.5 million new housing units completed, and a 1.7 million spike in 2020 alone, new construction would need to accelerate to a pace that’s well above this current trend to more than 2 million housing units per year to close this gap. Even if building were to continue at the current level, the most rapid pace in more than a decade, it will still take more than 20 years to close the 5.5 million unit gap.”
- “we made more architectural paint gallons in March than in any previous month in our company’s history”
- “European demand also remains strong, although we continue to closely monitor for potential impacts from the war in Ukraine.”
On Supply chains:
- “the supply chain is not completely recovered as the bottleneck has now largely moved from suppliers’ production to their transportation and logistics. In the near-term, we’re speeding this recovery by employing our own fleet and tank wagons to supplement suppliers’ delivery capabilities. Our ability in this area is unique among our competitors.”
Additional Highlights:
- Revenue and margin headwinds will subside later in 2022…
- Disruptions are acting as a short-term headwind – Natural disasters (winter storm Uri and Hurricane Ida) destroyed the industry’s raw material supply chain, which led to poor availability and unprecedented cost inflation due to high demand. Labor and transportation costs also became elevated throughout the year. Lastly, the new COVID variant (Omicron) added to operational complications.
- America’s Group ($2.6B), +5.6%:
- Sales increased 5.6% including low-double-digit pricing; same store sales increased 3.8%
- Segment margin improved 170 basis points sequentially
- Consumer Brands Group ($700m), -10%:
- Sales decreased 10.1% driven by difficult prior year comparisons, lower sales outside of North America and the Wattyl divestiture (-6%). High-single-digit price realization in the quarter
- The Performance Coatings Group ($1.65B), +20%:
- Sales increased 20.4% including mid-single-digit volume growth and mid-teens pricing
- Double-digit growth in North America, Asia and Latin America; high-single-digit growth in Europe
- Packaging and Coil highest year-over-year increases and double-digit growth in every region
- General Industrial and Auto Refinish growth in all regions
- Industrial Wood strength in North America driven by strong architectural end markets
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109