The current earnings season has put a spotlight on companies with an industrial focus, as some market participants are looking closely at whether the business cycle could be ready to turn lower. Although paint and coatings manufacturer Sherwin-Williams (SHW -1.10%) also has an extensive consumer-facing business, it still has considerable exposure to the industrial sector, and the company has had to do extensive work to integrate its Valspar acquisition successfully. At the same time, peers in the paint business have run into difficulties that have hurt investor confidence in Sherwin-Williams as well.
Coming into Thursday's third-quarter financial report, Sherwin-Williams investors wanted to see solid evidence of good growth trends. Unfortunately, the paint maker wasn't able to deliver gains that were as large as many had hoped, and some of the comments that Sherwin-Williams executives made pointed toward potential challenges ahead that could further disappoint shareholders.
Image source: Sherwin-Williams.
Painting a mixed picture
Sherwin-Williams' third-quarter results reflected some difficult conditions for the paint maker. Sales were up just 5% to $4.73 billion, which was slower than the 7% growth rate that those following the stock had wanted to see. Net income from continuing operations of $354 million was higher by 12% from the year-earlier period, but even after making allowances for an extensive list of extraordinary items, the resulting adjusted earnings of $5.68 per share fell short of the consensus forecast among investors for $5.74 per share.
From a segment perspective, Sherwin-Williams got fairly balanced contributions from all of its business units. In the key Americas group, sales rose 5% on strength in architectural paint sales volume and slightly higher selling prices. Same-store sales in the U.S. and Canada were up 5.2% from the previous year's third quarter, and profit for the segment was up 10% over the period. Raw materials costs ate into profit to some extent, but pricing power and higher volume helped to boost margin and drive bottom-line gains.
Sherwin-Williams' consumer brands segment saw faster sales growth of 6.5%, with a new customer program adding revenue along with price increases. Despite lower volumes to retail customers, better profit margin figures helped lift segment profit by almost 20% from year-earlier levels. Performance coatings, meanwhile, saw the slowest sales rise of 4.2%, but profit jumped more than 75% year over year thanks largely to accounting impacts and price hikes.
CEO John Morikis wasn't entirely pleased with the performance. "We continue to make great progress on the integration of Sherwin-Williams and Valspar into a faster growing, more profitable enterprise," Morikis said, "but our results in the third quarter don't fully reflect that progress." The CEO blamed a number of factors, including slower growth in North American architectural businesses, industrial slowdowns in China and Europe, adverse foreign exchange impacts, and cost pressures in various parts of the company's business operations.
Can Sherwin-Williams bounce back?
Overall, Sherwin-Williams remains optimistic about its future, especially after the Valspar merger. In Morikis' words, "While our results in the quarter fell short of our initial expectations, we remain confident in and excited about the long term value created by the combination of these two great companies."
Yet guidance for the rest for the year was mixed. Sherwin-Williams sees fourth-quarter revenue rising by mid-single-digit percentages, which is reasonably consistent with what investors were expecting. However, the paint company cut its GAAP earnings guidance by more than $1 per share, projecting $13.85 to $14 per share for the full year. Even after accounting for some extraordinary items, adjusted earnings guidance for $19.05 to $19.20 per share was at the low end of what Sherwin-Williams had given as its range last quarter.
Sherwin-Williams investors were nervous about the results, and the stock was down 3% in pre-market trading following the announcement. If pressure from the industrial sector keeps weighing on overall performance, then Sherwin-Williams could have trouble bouncing back from its recent setback -- especially in an economic environment filled with uncertainty.
