Heading into this week's second-quarter earnings report, investors had a few worries about global paint titan Sherwin-Williams' (NYSE:SHW) operating trends. Sales have been spiking, mainly thanks to the company's recent merger with Valspar. However, that has been tempered somewhat by the fact that increasing raw material costs are pinching profits.

Those elevated expenses showed up again in the fiscal second quarter and should continue to impact results going forward. But Sherwin-Williams is doing a good job offsetting the costs by boosting selling prices. Strong demand, meanwhile, convinced management to predict robust sales growth for the remainder of the year.

More on that detailed 2018 outlook in a moment. First, here's how the latest results stacked up against the prior-year period:

 Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$4.77 billion

$3.74 billion

28%

Net income

$404 million

$319 million

27%

Earnings per share

$4.25

$3.36

27%

Data source: Sherwin-Williams' financial filings.

What happened this quarter?

Sales growth slowed sharply from the prior quarter, but only because the company has now reached a full year of owning the Valspar paint portfolio. Core sales gains were strong across Sherwin-Williams' three reporting groups, but the profit picture was more mixed due to costs associated with integrating Valspar into the wider business.

Paint cans.

Image source: Getty Images.

Highlights of the quarter include:

  • Sales in the Americas Group rose 8% thanks to a mix of higher sales volumes and increased selling prices. Profitability in this segment held steady at 22% of sales.
  • The consumer brands division logged a 45% sales spike on the inclusion of the Valspar business and higher selling prices, offset somewhat by slower sales volumes. Profitability fell in this segment to 12% of sales from 14% as Valspar transition costs ate into earnings.
  • Sherwin-Williams' performance coating business rose 80% on higher volumes and prices, and profitability improved to 11% of sales from 8% in the prior year.

What management had to say

Executives said customers continued to respond positively to Sherwin-Williams' broad paint portfolio, which helped the company deal with rising costs. "Underlying demand remained solid across most of our end-market segments during the quarter," CEO John Morikis said in a press release, but "raw material costs continued to inflate ... at a slightly higher rate than anticipated."

Nevertheless, management was happy with the broader results. "All three operating segments delivered year-over-year improvement in net sales and profit," Morikis said. And, regarding the Valspar merger, executives said that Sherwin-Williams' sales segments are ahead of schedule in integrating their respective businesses.

Looking forward

Morikis and his team see sales rising in the range of the mid-to-high single digits in the third quarter, which includes Valspar sales in both that time period and in the year-ago period. The company's broader outlook remains bright, with sales expected to rise in the high teens to low 20-percent range. 

Raw material costs are still trending higher, which clouds the picture for earnings. In fact, Sherwin-Williams' updated full-year outlook calls for EPS of between $15.00 and $15.20, compared to the prior target range of between $14.95 and $15.45. The new forecast translates to another slight earnings downgrade as the company continues to work through expenses related to integrating its Valspar acquisition into its global business.

 

Demitrios Kalogeropoulos owns shares of Sherwin-Williams. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.