Major corporate acquisitions are complicated to work through, and often, surprises come up that prove more costly than anticipated. Paint and coatings manufacturer Sherwin-Williams (NYSE:SHW) has worked long and hard to close on its acquisition of Valspar last year, but even now, there's work left to do to integrate the two businesses fully to take maximum advantage of their potential synergies.
Coming into Tuesday's first-quarter financial report, Sherwin-Williams investors had high hopes that earnings and sales would continue on their upward trajectory. Sherwin-Williams didn't disappoint with its backward-looking results, but it did have to cut its guidance for full-year earnings because of unexpected issues related to the Valspar business. Nevertheless, the paint maker's long-term prospects still appear sound, making the stock's price decline seem out of line with Sherwin-Williams' true value.
Here's what happened with Sherwin-Williams this quarter
Sherwin-Williams' first-quarter results showed the general strength in the business and the impact of the Valspar acquisition. Revenue soared 44% to $3.97 billion, which was slightly stronger than most of those following the stock had anticipated seeing. Net income was up just 5% to $250.1 million, but after taking into account acquisition costs related to Valspar, adjusted earnings of $3.57 per share were well above the consensus forecast among investors for $3.15 per share.
One thing that's not entirely clear is the extent to which investors were incorporating expectations about Valspar's contribution to the business. The newly acquired unit had operational income of $1.08 per share, with debt interest expense pulling down the total contribution from Valspar to $0.68 per share of Sherwin-Williams' overall profits. Taking out Valspar, Sherwin-Williams' legacy business earned $2.89 per share, which might have been less than at least some followers of the paint company had wanted to see.
Sherwin-Williams stayed on pace from a fundamental standpoint. In the Americas group, which saw few impacts from acquisitions, sales were higher by 6.6%, boosted by higher sales volume and price increases for architectural paint. Comparable sales in the U.S. and Canada rose 5.2%, which was somewhat slower than in previous quarters. Segment profit climbed at a 10% pace from the year-ago period. Meanwhile, consumer brands group sales more than doubled, but with Valspar's contribution, the unit's revenue would have declined due to lower volume sales to segment customers. Still, profit for the unit jumped by a third despite higher raw material costs. In performance coatings, Sherwin-Williams saw the segment top line soar more than 150%, with modest organic growth adding to the huge impact of Valspar's addition to the portfolio, and segment profit jumped by more than half.
CEO John Morikis was happy with how things went. "The contribution of the Valspar business t our consolidated revenue and profit continues to build momentum," Morikis said, "and we saw positive sales volume, pricing and improving operating results from each of our reportable segments." He did note that a slow start to the painting season in North America weighed on results, though, and materials costs and sluggish economic growth globally were further headwinds to success.
What's next for Sherwin-Williams?
In general, Sherwin-Williams sees the good times continuing. The company believes that second-quarter sales should rise by mid- to high-single-digit percentages, with Valspar adding about $600 million to April and May sales as the companies approach the one-year anniversary of their merger.
Yet investors seemed to focus on a guidance cut from the paint giant. Sherwin-Williams now believes that earnings will come in between $14.95 and $15.45 per share, down $0.40 from its guidance last quarter. The company attributed the reduction to an expanded consumer agreement related to Valspar, and there are a number of extraordinary items related to the acquisition and to tax reform that will affect Sherwin-Williams' overall bottom line in 2018.
Still, Sherwin-Williams was pleased to restart its stock buybacks. The company purchased 600,000 shares of stock during the quarter, leaving it with authorization to repurchase more than 11 million additional shares in the future.
Sherwin-Williams investors weren't happy with the guidance cut, and the stock fell more than 4% in pre-market trading following the announcement. But as the company moves forward, Sherwin-Williams looks poised to capitalize on the greater opportunities in front of it, and its larger scale following the Valspar acquisition makes it an even more important player in the industry.