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Sherwin-Williams Suffers From Hurricane Hits

By Dan Caplinger - Oct 24, 2017 at 10:05AM

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Executives still think a key move will help the paint specialist going forward.

The hurricanes that hit Texas, Florida, Puerto Rico, and surrounding areas since late August have wrought massive devastation, and they've brought local economies to a standstill in some places. That had an impact on companies with retail operations across the affected regions, and Sherwin-Williams (SHW 3.12%) was no exception. Even though the company has benefited from a shift in demand toward the professional contractor market to do paint work, weeks of limited operations took their toll on Sherwin-Williams' ability to squeeze the most from what has been a favorable housing market lately.

Coming into Tuesday's third-quarter financial report, Sherwin-Williams investors were prepared for sluggish performance, but they still wanted to see double-digit earnings growth and big sales gains from the paint maker's purchase of rival Valspar. Sherwin-Williams was able to beat reduced expectations, but the news it gave about its future made some shareholders nervous. Let's look more closely at how Sherwin-Williams did and what lies ahead for the paint specialist.

Dragon made from paint samples in front of buildings with Asian architectural styles and lanterns.

Image source: Sherwin-Williams.

Stormy times for Sherwin-Williams

Sherwin-Williams' third-quarter results looked reasonably good. Revenue climbed by 37% to $4.51 billion, reflecting the acquisition of Valspar and beating the 35% top-line growth that those following the stock were expecting to see. GAAP net income was once again down, falling 18% to $316.6 million, but most of that pressure came from merger costs. Adjusted earnings of $4.75 per share were better than the consensus forecast among investors for $4.67 per share.

Sherwin-Williams would have done even better had it not been for the hurricanes that hit during the quarter. The company estimated that sales would have been $50 million higher without the disasters, and they reduced earnings by about $0.27 per share.

Still, top-line performance was solid. Same-store sales in the U.S. and Canada were up 5.2% from year-ago levels. The new Americas group posted a better-than-6% rise in segment revenue, with the Latin America region seeing renewed growth of about 5%. Segment profit was up about 1%, as higher sales volume was offset by higher costs and the hurricane-related hits. Unlike what the company has seen in some quarters in the past, currency didn't have a material impact on Sherwin-Williams in the third quarter of 2017.

Valspar sent the consumer brands group soaring, with sales gains of more than four-fifths. Acquisition-related costs sent the segment's profit down by about a fifth to $70.4 million during the quarter, but improved operating efficiencies and cost controls managed to limit the damage and show the progress that Sherwin-Williams has made with its business integration efforts. Similarly, the performance coatings group saw revenue soar by more than 150%, with a similar Valspar-inspired drop in segment profit due largely to one-time costs.

Sherwin-Williams CEO John Morikis was happy that the damage he predicted back in late September turned out to be at the low end of previous expectations. "The string of natural disasters impacting Texas, Florida, the Caribbean, and Mexico in recent months was unprecedented," Morikis said, "and so was the response of the Sherwin-Williams team members in those communities." The CEO pointed to all the help that workers gave to those in need and what it meant for the company's reputation.

What's next for Sherwin-Williams?

Sherwin-Williams has a simple long-range plan. In the words of Morikis, "We remain focused on strengthening the performance of our core businesses and our newly acquired businesses." With price increases to offset higher costs and efforts to boost sales volumes, Sherwin-Williams wants to capitalize on the current favorable environment in the industry.

Yet some investors were disappointed with Sherwin-Williams' guidance. In the fourth quarter, the paint specialist sees earnings of $1.97 to $2.27 per share, with a hit of nearly $1 per share coming from Valspar costs. For the full 2017 year, Sherwin-Williams reduced its guidance to $11.20 to $11.50 per share, boosting its estimate of total Valspar-related expenses from $2.50 per share last quarter to $3.21 per share now. Earnings contributions from Valspar will be at the bottom end of its previous range, coming in between $0.75 and $0.85 per share in 2017.

Sherwin-Williams investors were somewhat disappointed with the news, but the stock lost less than 1% in pre-market trading following the announcement. Post-merger integration has been a long effort, but eventually, Sherwin-Williams will enjoy all of the benefits of the purchase without all the current hassles it's dealing with right now.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.

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