Growth investors want companies that can take advantage of business opportunities to expand, and Sherwin-Williams (NYSE:SHW) has generally delivered on that promise in its history. Between organic growth in its paint business and efforts to grow through strategic acquisitions, Sherwin-Williams has delivered strong returns for shareholders over time.
Yet recently, those growth trends have slowed, and coming into Tuesday's third-quarter financial report, Sherwin-Williams investors hoped that the company would be able to accelerate its top- and bottom-line increases heading into the second half of the year. Instead, earnings gains slowed even further, and guidance for the rest of the year left some investors unhappy with where the paint maker appears to be going.
Let's look more closely at the latest results from Sherwin-Williams with an eye toward interpreting what they mean going forward.
Sherwin-Williams faces an ugly reality
Sherwin-Williams' third-quarter results again continued a troubling streak of results that weren't able to live up to all of its investors' hopes. Sales climbed 4% to $3.28 billion, falling just a fraction of a percentage point short of what most of those following the stock had anticipated. The news on the bottom line was more concerning, with net income rising just 3% to $386.7 million and producing earnings of $4.08 per share. Even after incorporating one-time charges for costs associated with the Valspar (NYSE:VAL) acquisition and other extraordinary items, adjusted earnings missed the consensus forecast among investors by $0.09 per share.
Looking more closely at Sherwin-Williams' numbers, the mixed picture that the company painted last quarter remained evident in this report. The paint stores group was the crown jewel of Sherwin-Williams' overall business, with sales climbing 6.7% from year-ago levels. Comparable-store sales were up 2.1%, and segment profit was up 2% as well. The company cited higher overhead costs in limiting the boost to the segment's bottom line, but stronger sales of architectural paint across most of its end markets helped the business.
Once again, though, other parts of the business failed to pull their share of the weight for Sherwin-Williams in producing top-line growth. The consumer group's sales fell 2.1%, with lower sales volumes both to its retail and commercial customers. A rise in operating efficiency helped to keep segment net income on the rise, but it only grew at a 4% clip compared to the year-ago quarter. Similarly, the global finishes group suffered a 1.1% sales drop during the quarter, although profit rose nearly 15% year over year. The Latin America coatings group only managed to post a 0.4% rise in revenue and suffered a more than 50% drop in segment profit.
Sherwin-Williams CEO John Morikis characterized the pressure as temporary. "Revenue growth on a comparable basis slowed sequentially in the third quarter across most of our reportable segments," Morikis said, but "despite this slowdown, we remain bullish on future demand across most of our end markets." The CEO noted that 24 new store locations during the third quarter brought the year-to-date total to 55 for the paint stores group.
What's ahead for Sherwin-Williams?
One problem is that the results that Sherwin-Williams has posted lately have actually benefited from factors that will likely disappear in the near future. As Morikis put it, "The input cost tailwinds are likely to turn to headwinds, and the slower pace of sales growth is unlikely to fully offset our investments in new stores, territories, and retail programs already in place." Sherwin-Williams predicted that fourth-quarter earnings will come in between $1.45 and $1.55 per share, and that's well below the $2.44 per share consensus forecast even after making allowances for Valspar-related costs.
Sherwin-Williams also cut its full-year guidance. The company once again said that it expects sales to rise only by a low-single-digit percentage, and earnings will likely be between $11.30 and $11.40 per share, a cut of between $0.35 and $0.45 per share from its previous guidance.
Finally, the company said that it had named Al Mistysyn to be its chief financial officer as of Jan. 2017. Outgoing CFO Sean Hennessy will stay with the company to help with the Valspar transition, and Sherwin-Williams highlighted the move as part of its multiyear succession planning process.
Overall, Sherwin-Williams investors won't be entirely happy with Sherwin-Williams' results, and the stock could take a short-term hit as a result. Yet if the investments that the company is making pay off, then Sherwin-Williams could easily see a much healthier future for its business in the long run.