Earnings Preview: Sherwin Williams - Analyst Blog
October 24 2011 - 12:30PM
Zacks
Sherwin-Williams
Co. (SHW) will release its results
for the third quarter of 2011 before the market opens on October
25, 2011.
Sherwin-Williams reported
net earnings of $1.58 per share in the second quarter of 2011
missing the Zacks Consensus Estimate of $1.77 per share.
However, excluding charges of 8 cents per share relating to costs
to repurchase $84.9 million of long-term debt, diluted net income
was $1.66 per share versus $1.64 per share in the prior year
quarter.
The second
quarter earnings were at the low end of the company’s guidance
range due to high raw material costs versus the timing of its price
increases.
In the
upcoming quarter, the Zacks Consensus Estimate for Sherwin-Williams
is pegged at a profit of $1.70 per share, reflecting an annualized
growth of 6.15%.
With respect
to earnings surprises, the company surpassed the Zacks
Consensus Estimate in two out of four quarters - an average
surprise of 5.24%.
Second Quarter
Review
Net sales
for the quarter increased 9.9% year over year to $2.36 billion
driven by acquisitions and selling price increases and strong
organic sales growth by the Global Finishes Group. Sales were also
boosted by favorable currency translation rate changes.
Sherwin-Williams’ second quarter sales also missed the Zacks
Revenue Estimate of $2.40 billion.
Cost of
goods sold increased 13.7% to $1.33 billion in the quarter and
expressed as a percentage of revenues, it increased to 56.6%. Gross
profit surged 5.2% to $102.2 million while gross margin dipped 200
basis points year-over-year to 43.4%.
Selling,
general and administrative expenses were $755.6 million, an 8.5%
climb over $691.2 million in the prior-year quarter.
The Paint
Stores Group posted net sales of $130.0 million, up 9% from $124.5
million in the year-ago period. The improvement was largely
attributable to selling price increases and expanding domestic
architectural paint sales to residential repaint contractors and
do-it-yourself customers.
Segment
profit decreased 2.5% year over year to $206.6 million and as a
percentage of net sales it decreased in the quarter to 15.9% from
17.0% last year.
Net sales of
the Consumer Group fell 8.4% from the same period last year to
$375.6 million due primarily to the elimination of a portion of a
paint program with a large retail customer partially offset by
selling price increases. Segment profit decreased 23.9% to $61.4
million year over year mainly because of increasing raw material
costs, but partially offset by selling price increases.
Net sales of
the Global Finishes Group soared 39.5% to $678.9 million in the
quarter as a result of acquisitions, higher paint sales volume,
selling price increases and favorable currency translation rate
changes. The segment’s profit was $46.1 million, up 15.3% from $40
million recorded during the corresponding quarter of 2010. The
progress was derived from increased paint sales volume and
favorable foreign currency translation rate changes.
Agreement of Estimate
Revisions
One out of
the 13 analysts covering the stock for the third quarter of fiscal
2011 has made a downward revision in the last 7 days. No one has
made an upward revision during that time.
Magnitude of Estimate
Revisions
The third
quarter 2011 estimate remained flat at $1.70 per share in the last
7 days and last 30 days. The Zacks Consensus Estimate for the third
quarter is 6.15%, higher than the year-ago profit of $1.60 per
share.
Our
Take
Sherwin-Williams 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 to shield Sherwin-Williams from any
significant price hikes.
Consequently, we remain
skeptical about a strong near-term improvement of these segments.
The company’s operating segments continue to control costs and
implement price increases in an effort to keep pace with rising raw
material costs. However, higher raw material prices remain a
concern. We currently have a Zacks #4 Rank (short-term Sell
recommendation) on the stock.
Management
expects net sales to increase in the range of 10% to 15% in the
third quarter of 2011 compared to the third quarter of 2010. The
company expects diluted net income per common share for the third
quarter to be in the range of $1.65 to $1.75 per share compared to
$1.60 per share in 2010.
For full
year 2011, Sherwin expects consolidated net sales to increase above
2010 levels by high single digits to low teens percentage. With
annual sales at that level, the company forecasts its full year
2011 guidance for diluted net income per common share for 2011 to
be in the range of $4.65 to $4.85 per share, compared to $4.21 per
share earned in 2010.
Based in
Cleveland, Ohio, Sherwin-Williams is a developer, manufacturer,
distributor and seller of paints, coatings, industrial and marine
products, original equipment manufacturer product finishes and
related items, and automotive finishes and refinish products in
North and South America, Europe, and Asia. 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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