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Why Sherwin-Williams Co.'s Shares Plunged 11% Today

By Travis Hoium – Oct 25, 2016 at 10:40AM

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A weak earnings report didn't help the paint maker, but its future still looks bright.

Image source: Getty Images.

What happened 

Shares of paint company Sherwin-Williams Co (SHW 3.57%) fell as much as 11.2% on Tuesday after it announced third-quarter earnings. They closed down 10.9% on the day. 

So what

Sales rose 4% in the quarter to $3.28 billion and net income was up 3.3% to $386.7 million, or $4.08 per share. On an adjusted basis, earnings were $4.23 per share, which fell short of the $4.31 per share Wall Street analysts had expected. 

Costs incurred ahead of the Valspar (VAL) acquisition hurt net income last quarter, but most of those expenses were one-time events. What could hurt results going forward are cost headwinds in the rest of the year, and management's expectation of those led it to guide for earnings per share of $1.45 to $1.55 in the fourth quarter, compared to the $2.12 per share it earned a year ago. That's a slide investors weren't happy about today. 

Now what

Results are a little uneven right now because Sherwin-Williams is spending millions to prepare for the closing of the Valspar deal. But once that's complete, the merged company should have more efficient distribution and better pricing power, leading to better earnings. Today's result is disappointing for investors, but keep in mind that earnings are still expected to be $11.30 to $11.40 per share, implying about a 22 P/E ratio ahead of the Valspar deal. With earnings power likely to grow in the future, this could be a buying opportunity in a business that will be here for decades to come. 

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. 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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