Is Sherwin-Williams Painting a Good Picture? Not Really.

Paint retailer Sherwin-Williams (NYSE: SHW  ) reported a 9.9% jump in its second-quarter revenues -- but, to investors' chagrin, the company failed to convert those incremental revenues into income. Rising raw material costs ate into the top line.

A 1.4% drop in net profits and a tepid full-year forecast sent its shares down by almost 5%. So, what should investors make out of Sherwin's numbers?

The quarter in detail
Sherwin's bottom line slid to $179.1 million from $181.7 million in the year-ago period. Though revenues in its paint stores and global finishes segments rose 4.3% and 39.5%, respectively, due to higher selling prices and volumes, high input costs offset those gains as well.

Rising input costs have been weighing on the paint industry. Rival Valspar's (NYSE: VAL  ) second-quarter net income also fell by 9% on higher costs, even though higher selling prices partially helped boost its revenues. The recent acquisition of a U.K. coating business also marginally affected Sherwin's margins this time around.

Same-store sales, a key retailer health-gauging metric, grew 4% in the paint stores segment. This encouraging existing-stores sales news might have also influenced the addition of 11 net new stores this quarter. So while the past looks not-so-impressive, perhaps the future is looking rosier.

Sherwin's cash balance stands at $71.5 million, of which the company spent $41.7 million in the latest quarter to buy back 0.5 million shares. It still has 4.15 million shares left to be repurchased under its current plan.

Cash is a bit tight as a whole for my liking. But fortunately, the Cleveland-based company maintains a low long-term debt to capital ratio of 21.7%. An interest coverage ratio of 22.8 further places it in a very comfortable position to service debts. Meanwhile, Sherwin intends to continue spending on share repurchases, while also manifesting plans of adding 50 to 60 new stores this year.

The catch
From a business standpoint, prices of inputs such as titanium dioxide and propylene have been shooting up, hurting the coating industry. As a result, companies continue to hike product prices to offset costs. Both Sherwin and Valspar announced price hikes in June. PPG Industries (NYSE: PPG  ) also intends to raise prices in businesses facing cost pressures.

The world's largest titanium dioxide producer, DuPont (NYSE: DD  ) , has announced fresh price hikes going into effect in September. Market participants also expect a further rise in titanium dioxide prices. In such a situation, I doubt how much future product price hikes on Sherwin's side will be able to save margins in the near future.

The paint business further depends on factors like housing and consumer spending. Used home sales, in particular, affect paint sales, as buyers usually remodel such homes. Now, with pre-owned home sales falling consistently and the overall housing situation still weak, the retail paint industry is not looking bright just yet.

The Foolish bottom line
Sherwin's sales are growing, but the company has lowered its 2011 guidance, reducing the high end of the earlier EPS forecast from $5.05 to $4.85. While I'm remaining on the sidelines now, the stock looks worth watching once the housing sector recovers and lower input costs prevail.          

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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