APD Air Products and Chemicals Inc

We are maintaining our Neutral recommendation on Sherwin Williams Company (SHW) as it is recovering with improving domestic and international sales of automotive finishes, original equipment manufacturers’ product finishes, and protective and marine coatings.

The Paint segment has also seen some rebound. The company is focused on capturing a larger share of its end-markets, as is evident from the increasing number of stores.

Sherwin reported net earnings of $0.63 per share in the first quarter of 2011, more than double of $0.30 per share in the year-ago period and up $0.11 from the Zacks Consensus Estimate of $0.52. The first-quarter earnings also whizzed past the company’s guided range of $0.48 to $0.58 per share.

Net sales for the quarter increased 19% year over year to $1.85 billion driven by acquisitions and selling price increases. Sherwin-Williams’ first quarter sales also exceeded the Zacks Revenue Estimate of $1.82 billion.

We expect Sherwin’s strong cash flows and balance sheet to support growth opportunities. Sherwin expects its second-quarter net sales to increase in the range of 8% to 13% year over year.

The company anticipates EPS between $1.65 and $1.75 per share for the quarter. Aggressive efforts in tighter cost controls, working capital reductions, supply chain optimization and productivity improvement should yield better margins.

We believe that Sherwin’s aggressive efforts for tighter cost controls, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits. Sherwin is utilizing its cash strategically. The company repurchased 5 million shares in 2010.

During the first quarter 2011, the company repurchased 1.1 million shares. As of March 31, 2011, the company had 4.65 million shares remaining under the board authorization program. Long-term debt capitalization of 39.4% as of December 31, 2010 increased from 35.4% in December 31, 2009.

However, Sherwin has experienced weak pricing power in the Consumer and Paint segments. The Consumer business has lost a significant customer while continuing to experience weak sales among large retail accounts. This suggests that end-market demand among third party distributors is not strong enough for Sherwin-Williams to realize any significant price hikes. Consequently, we remain skeptical regarding a strong near-term improvement of these segments. At current levels, we do not expect a further slide in the stock price.

The company’s key competitors include PPG Industries Inc. (PPG), The Valspar Corporation (VAL) and Air Products and Chemicals Inc. (APD).

 
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