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Why Sherwin-Williams Stock Surged 11% in May

By Lee Samaha – Updated Jun 5, 2020 at 8:23AM

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The paint and coatings stock enjoyed another strong month and is flirting with being up on the year in 2020.

What happened

Shares of paint and coatings company Sherwin-Williams (SHW 1.52%) rose 10.7% in May, according to data provided by S&P Global Market Intelligence. The stock outperformed the S&P 500 index in the month but slightly lagged the performance of its peer group.

In short, the sector did well because the market had a more positive outlook for economic growth. That's a plus for the paint and coatings industry because its prospects are typically seen as being tied to the economy through key end markets, namely housing, commercial construction, general industrial, automotive (original equipment and refinish), and marine.

SHW Chart

Data by YCharts.

Why did Sherwin-Williams underperform its peers? It probably comes down to the fact that PPGAxalta, and RPM are relatively more exposed to more cyclical end markets such as automotive and general industrial coatings. Therefore, when the market is more positive about the global economy, these stocks tend to outperform.

At any rate, Sherwin-Williams shareholders are perhaps happy with the company's relatively higher exposure to architectural paints because it caused the company to receive a sales boost in the first quarter as stay-at-home measures encouraged do-it-yourself activity. It's not enough to fully offset the negative impact of the pandemic, but it's kept the stock relatively flat on the year so far.

A family painting their house.

Image source: Getty Images.

So what

The brighter outlook on the economy suggested Sherwin-Williams might report full-year results closer to the high end of management's guidance ranges. After all, it had expected income per share of $19.91-$20.71 compared to $16.49 in 2019. However, that range was revised downward on the first-quarter earnings call to between $16.46-$18.46.

If you add back acquisition-related expenses of $2.45, then the adjusted earnings-per-share range is $18.91-$20.91, meaning the stock trades on 29 times the midpoint of its guidance range for 2020.

Now what

Sherwin-Williams isn't a superficially cheap stock so investors will be hoping housing markets remain solid while economic growth picks up in the coming quarters. Both outcomes would help the company get back on the growth track.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends RPM International and Sherwin-Williams. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Sherwin-Williams Company Stock Quote
The Sherwin-Williams Company
$211.22 (1.52%) $3.17
PPG Industries, Inc. Stock Quote
PPG Industries, Inc.
$112.32 (0.36%) $0.40
RPM International Inc. Stock Quote
RPM International Inc.
$85.53 (-0.15%) $0.13
Axalta Coating Systems Ltd. Stock Quote
Axalta Coating Systems Ltd.
$22.30 (-1.63%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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