Sherwin-Williams Company (NYSE:SHW), the owner of popular brand names like Sherwin-Williams, Dutch Boy, Krylon, Minwax, Thomson’s and Water Seal, recently declared its second quarter results. The company missed consensus estimates both on top and bottom lines. What went wrong? And is there any hope going forward? Let’s try to find out.
Revenue & earnings
Earnings of the company stood at $2.56 per share, which missed consensus estimates of $2.58, but were more than the year-ago quarter’s earnings of $2.17 per share. On adjusting $0.08 for the settlement related to import duty assessment in Brazil operations and $0.02 per share adjustments for unfavorable currency translations, the earnings worked out to $2.46 per share.
The results have been disheartening for investors and this resulted in the share price moving south. The company fell short of consensus estimates and it blamed the loss of business from key retailer Wal-Mart and also emphasized that its non-residential sales were short of targets as compared to residential. Also, consumer group sales saw a dip of 1%, even after 3.2% contribution from acquisitions.
Prospects
For the current quarter, Sherwin-Williams Company (NYSE:SHW) expects that revenue will increase 6%-9% from last year. The company also expects to see EPS in the range of $2.55-$2.65 compared to last year’s record performance of $2.24 per share for the quarter. For 2013, the company expects to see earnings in the range of $7.45 to $7.55 per share as compared to $6.02 in 2012.
Housing markets are showing slowing momentum, and that isn’t a good sign for all related stocks and Sherwin-Williams Company (NYSE:SHW) is no exception. The company is seeing a cut in earnings estimates.
There’s been a rise in the mortgage rates recently, and a slowdown in pending home sales suggests there is risk of the earnings growth rate decelerating. Higher mortgage rates will not only affect sales of new homes, but will also reduce refinancing activity and hence, homebuyers will have less cash available for remodeling.
None of the analysts have revised their earnings estimates upward for the coming quarters or for fiscal 2014. Also, all estimates have declined in past 30 days for 2013 and 2014.
Competitors
For those who want to have an exposure to paints and coatings, besides Sherwin-Williams Company (NYSE:SHW), they can also look at PPG Industries, Inc. (NYSE:PPG) and The Valspar Corporation (NYSE:VAL), so it would be apt to say that Sherwin-Williams Company (NYSE:SHW) competes with the two when it comes to fighting for a share of investors’ dollars.
PPG Industries, Inc. (NYSE:PPG)’s Industrial coatings sales volumes were up 12%, driven by its automotive sales. The company was keen to highlight that this is partly a result of excellent long-term positioning within the leading car companies. It claims to be the number one player in automotive coatings in North America and China. In the industrial segment, companies that have exposure to automobiles and aerospace have done well, whereas other segments have not been so encouraging.
One of the most astonishing yet encouraging aspect of PPG’s results was that architectural coatings income increased by $5 million in Europe, Middle East and Africa (EMEA) to $69 million, despite sales declining 5%. This increase is indicative of how well its management is implementing cost savings programs.
The company has all the catalysts for growth. Input costs are moderate, the automotive and aerospace sectors are growing strongly, and investors can look forward to some upside.
The Valspar Corporation (NYSE:VAL) recently concluded its takeover of Italy-based industrial coatings maker Inver Holding, and this adds to the capability of the company to expand its European coatings business. Valspar expects to reinforce its position in the $6 billion industrial coatings markets in Europe. Offering operational synergies, this acquisition will enable Valspar to leverage Inver’s strong product portfolio, leading technology and distribution network in order to expand client base and hence add to the top-line and earnings in the future.
With the company-wide focus on winning new businesses, Valspar is all set for a bright future. The company remains committed to making effective and meaningful investments in the world’s largest industrial markets such as China, Europe and Latin America to incite growth. Valspar expects to gain from new businesses in consumer paints, packaging, coil and wood coatings in the second half of fiscal 2013.
Final comment
Sherwin-Williams’ lack of diversification is a reason why I think that investors should consider staying away from it. In comparison, PPG makes for a better option given that it is more diversified and has a strong relationship with automakers.
ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams.
The article This Specialty Chemicals Company Is in for Difficult Times originally appeared on Fool.com and is written by ANUP SINGH.
ANUP is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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