How Supply Chain Woes Are Impacting Sherwin-Williams

Sherwin-Williams (SHW 0.36%) has been a big winner over the last decade, but like many of its peers, the company has been struggling with supply chain challenges. The paint company plans to raise prices to combat inflation and expects results to improve by the second half of 2022.

In this episode of "Beat and Raise" recorded on Jan. 27, Fool.com contributors Jeremy Bowman and Brian Withers discuss the company's latest quarter report and how it's being impacted by supply chain issues.

Brian Withers: I'm sharing your slide, and so go forward.

Jeremy Bowman: Yeah, thanks. Sherwin-Williams, big paint supplier, I'm sure you're familiar with them. Really one of the leaders in the business. A lot of companies in the basic materials industry, they're struggling with the supply chain issues. Nonetheless, Q4 revenue was up six percent, which I think is pretty solid in this environment to $4.76 billion. Though you can see that the matched estimates, I think technically the estimates were 4.77 billion we'll call it a meet. Earnings-per-share, however, was down 21 percent and that's the adjusted figure to $1.34, so that's a pretty solid miss there. You see the margins are really being impacted there with the unit growth and growth in revenue. But bottom line, declining earnings.

The company-the thing with the supply chain too is like there's limited availability, but there's also a lot of cost inflation going on for those companies, so they are getting hit in two ways. Their outlook I thought was pretty good for 2022, especially when you think of this as a mature company in a mature industry, even though there have been some pretty solid tailwinds in the home improvement sector. But so they're calling for about 10 percent revenue growth in 2022, which was slightly ahead of the analyst consensus. The bottom line, even stronger earnings growth, which if you think of the current environment, I think 16 percent adjusted earnings growth is pretty outstanding that was a little below, I think it was $9.77 was the current analyst average, but I think you've got to be happy with that guidance.

The company is expecting pretty strong tailwinds and sees the supply chain mess straightening itself out at second half of the year, so that's why you're seeing the strong earnings growth there, and pretty decent revenue growth I'd say too. Highlights-same-store sales. I don't know if up one percent for the fourth quarter is a highlight exactly, but that's in their core North American market. They were up 6.1 percent for the full-year, which I think is pretty good. Again, pandemic has been pretty good for home improvement, paint demand and all that stuff, and the company noted they're seeing strong end-user demand across all their channels and all their markets. Really, this is just the supply side issue, especially weighing on the margins and the profits. Another thing too, Brian, if I asked you how many stores Sherwin-Williams has in the country, what do you think?

Brian Withers: Oh, I don't know. Three thousand.

Jeremy Bowman: That's a pretty good guess they actually close to 5,000 and they opened 79 stores there. Yeah. Trevor shared 4,774 so they open.

Brian Withers: Approximately. [laughs]

Jeremy Bowman: I think this is really a source of competitive advantage for them. I mean, Walmart has a similar amount of stores than they like to say that they have a store within 10 miles of 90 percent of US population, so I think you can assume that that's the same for Sherwin-Williams just anecdotally, we had some house painting last summer when you're interviewing painters and one of them said I use Sherwin-Williams, because there's one in every town. So access as a key point of advantage in this industry and for them, you're not really doing great in e-commerce, shipping stuff, so having those stores is great.

Then the company noted raw material, availability issues, cut sales by high single digits in the fourth quarter, so that's pretty serious impact. They said mid-single-digits for the full year, I'm trying to wrap this up so we can get to Apple because I'm sure people want in a year about that, but concerned, obviously, you got your supply chain challenges weighing on the margins. Like I said before, the company sees that straining self out in the second half of the year, so that's good news. First-quarter guidance was only low to single-digit to mid-single-digit revenue growth, so expect some more pain in the current quarter and then the valuation, I think these are great numbers, but I think for a mature industry, and this stock and the price earnings ratio is about a 30 on a forward basis and 35 trailing. I think it's a little, you can call that stretched, the stock is down about 20 percent over the last month during this sort of crash we've had, so you might get a better price.

Brian Withers: Yeah, that makes sense. But they've been in this business a long time and I've seen inflationary times and certainly haven't seen the global pandemic, which I know during 2020 they had to close a number of their stores, and you're not really doing paint by e-commerce. You're not shipping paint through the shipping network. Having those stores open is critical and it's cool that they see that they're continuing to expand stores, even in the US and Canada.

Jeremy Bowman: Yeah, definitely a sign of strength there.