The Sherwin-Williams Company
SHW is gaining from synergies of the Valspar acquisition, focus on growth through expansion of retail operations and its productivity improvement initiatives amid certain headwinds including raw material cost inflation.
The paints and coatings giant, which currently carries a Zacks Rank #3 (Hold), has seen its shares gain 12.2% year to date, outperforming the 10.5% rise of its industry.
What’s Working in SHW’s Favor?
For 2019, Sherwin-Williams projects core net sales to increase 4-7% year over year. At this level, the company expects earnings in the range of $16.77-$17.77 per share compared with $11.67 in 2018.
The Valspar acquisition has enabled Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies. The company is gaining from significant acquisition synergies.
Sherwin-Williams expects incremental synergies of roughly $70-$80 million in 2019, with total annual run rate of around $415 million at the end of the year.
Moreover, Sherwin-Williams is seeing favorable demand in most of its end-use markets and remains committed to expand its retail operations. It is focused on capturing a larger share of its end-markets, as reflected by an increasing number of retail stores. The company added 76 net new stores in 2018 in its Americas Group unit. Plans are in place to add around 80-100 net new stores in 2019.
Sherwin-Williams’ cost control initiatives, working capital reductions, supply chain optimization and productivity improvement are also yielding margin benefits. Working capital management and efforts to cut operating costs are also helping the company to generate strong cash flows. The company generated net operating cash of around $2 billion in 2018.
A Few Headwinds
Sherwin-Williams remains exposed to raw material cost pressure. The company witnessed inflation across several raw material categories in 2018. It expects raw material costs for first-half 2019 to be higher on a year-over-year basis. Sherwin-Williams expects inflation to be in the low-single digits year over year for full-year 2019 with most impact is expected in the first quarter.
The company is also seeing reduced volume sales to some of its Consumer Brands Group unit’s retail customers. Net sales for the unit fell around 6.5% year over year in the fourth quarter of 2018, hurt by lower sales volume of the unit’s retail customers along with the impact of new revenue recognition standard. The headwind is likely to persist in the first quarter.
The Sherwin-Williams Company Price and Consensus
The Sherwin-Williams Company Price and Consensus | The Sherwin-Williams Company Quote
Stocks Worth a Look
A few better-ranked stocks worth considering in the basic materials space include Innospec Inc. IOSP, Ingevity Corporation NGVT and W. R. Grace & Co. GRA.
Innospec has an expected earnings growth rate of 3.5% for the current year and carries a Zacks Rank #1 (Strong Buy). The company’s shares are up around 17% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here .
Ingevity has an expected earnings growth rate of 17.9% for the current year and carries a Zacks Rank #2 (Buy). Its shares have rallied roughly 43% in the past year.
W. R. Grace has an expected earnings growth rate of 10.4% for the current year and carries a Zacks Rank #2. Its shares have gained around 16% in the past year.
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