Investors have some big questions heading into the fourth-quarter earnings report from Sherwin-Williams (SHW 0.45%), set for release in a few days. While the global paint giant revealed several key operating metrics in its preliminary release on Jan. 14, the upcoming announcement will include details about profitability, and about management's plans for passing along huge price increases over the next few months. We'll also learn whether CEO John Morikis and his team believe there will be a quick rebound in the areas that have been pressured by supply chain challenges through late 2021.
Let's take a closer look at what investors will be watching for in Sherwin-Williams' report on Thursday, Jan. 27.
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What's going on with sales trends?
We already have the broad-stroke story on growth thanks to management's preliminary release. Sales met management's overall outlook in Q4 by rising 6% to $4.76 billion. That result essentially matched the mid-to-high-single-digit forecast from late October and put growth at 9% for the full year, which is right at the "high-single-digit" range that executives issued a few months back.
Yet a major factor behind the company's issuing of a preliminary earnings report was presumably a few surprising pressures on growth in recent weeks. Executives said in the announcement that they have been "disappointed" with a few operating trends, including slower growth in the U.S. market. They mentioned shortages for some raw materials, supply chain challenges, and labor shortages as key issues, but this week's announcement should detail those problems and help explain whether they'll be big enough to impact fiscal 2022.
What impact will double-digit price increases have?
Sherwin-Williams plans to offset rising costs this year, and the first big test of that strategy will come in early February when the company rolls out a 12% price hike in the U.S. segment. The company implied in its last update that demand won't be harmed too much by this increase, but we'll get details on the expected impact on Thursday.
Meanwhile, we'll learn just how badly the cost spikes harmed profitability in late 2021. Earnings declined in the period, which management called a surprise that was driven by the sales challenges mentioned above. But we'll get more precise metrics on Thursday, including gross and operating profit margin. Executives said back in October they were confident these metrics would quickly rebound as inflation ebbed, but that tune might shift in this week's report.
Looking ahead to 2022
One of the biggest takeaways in this report will be Sherwin-Williams' initial 2022 outlook. Going into the announcement, most investors are expecting sales trends to hold up reasonably well, with revenue rising about 8% compared to the 9% the company likely achieved in 2021.
There are a lot of moving pieces within that broader stable trend, though, including price and volume increases over the year. Ideally, Sherwin-Williams can post a balance between these two figures that reflects rising prices and growing volumes across the business. If it has to compromise, though, management will likely choose temporarily lower earnings to protect its dominant market share.
As a result, the paint giant might disappoint investors in its 2022 profit forecast this week. But any slump should be temporary and will be felt across the entire industry. That's why the stock is still an attractive option for investors seeking stable growth and rising dividend income.
