Image: Sherwin-Williams.
When times are good, homeowners like to spend money to make their homes look better. In recent years, Sherwin-Williams (SHW +0.93%) has benefited from that favorable trend, with its paint products and retail locations working in concert to address demand. Yet rival PPG Industries (PPG +0.44%) recently posted results that showed that the industrial side of the paint and coatings business has seen conditions deteriorate, and coming into Thursday's third-quarter financial report, Sherwin-Williams investors weren't sure to what extent sluggish performance in its finishes and coatings segments might hold back gains from consumer-driven sales. Sherwin-Williams' results shined on the earnings front, demonstrating how important the strong consumer economy is right now. Let's look more closely at Sherwin-Williams to see how it gave investors a solid performance for the quarter.
Sherwin-Williams paints another pretty picture
Sherwin-Williams' third-quarter results reflected the mixed picture in its multiple businesses. Revenue was roughly flat from the year-ago quarter at $3.15 billion, which fell $100 million short of the 3% growth rate that investors had hoped to see from the paint specialist. On the bottom line, though, Sherwin-Williams fared much better, as net income surged 15% to $374.5 million, producing diluted earnings of $3.97 per share. That was more than a dime per share higher than the consensus forecast among investors.
A closer look at Sherwin-Williams' segment results shows the strength of the Paint Stores and Consumer Groups in helping to drive better performance. Net sales in the Paint Stores Group climbed nearly 3% to $2.09 billion, with the company citing higher sales volumes of architectural paints in driving comparable-store sales up 2.1% for the quarter. Paint Stores profits jumped 17.5% to $507.4 million, as profit margins soared by three full percentage points.
Gains in the Consumer Group were even more sizable. Net sales jumped more than 9% to produce a 12% rise in profit for the segment, as Sherwin-Williams' HGTV Home products continued to be a commercial success.
Elsewhere, though, Sherwin-Williams struggled. The Global Finishes Group suffered a 9% drop in revenue, largely because of the strong dollar, and profits fell in concert. Currency impacts were especially notable in the Latin America Coatings Group, where revenue sank 22% entirely because of an almost 24-percentage-point hit from weak foreign currencies, and profits nearly evaporated.
Sherwin-Williams CEO Christopher Connor tried to accentuate the positives in the report. "We continued to invest in our business by opening 45 net new locations in the Pain Store Groups in the first nine months [of 2015]," Connor said. "It is gratifying to report another quarter of sales increases and earnings-per-share growth."
Can Sherwin-Williams keep growing?
Sherwin-Williams gave investors guidance for the fourth quarter and updated its previous projections for the full 2015 year. The company expects sales to rise by low single digit percentages for the fourth quarter, producing earnings of $1.70 to $1.95 per share. Both figures are roughly in line with what investors were expecting from Sherwin-Williams. For the full year, the paint-maker narrowed its guidance toward the upper end of its previous range, now expecting earnings of between $10.75 and $11 per share on a low single-digit percentage rise in overall revenue.
Still, Sherwin-Williams has some challenges to overcome. PPG Industries' recent quarterly report showed extensive weakness on the industrial side of the paint and coatings business, and conditions in the sectors that provide PPG Industries and Sherwin-Williams with much of their industrial business don't show signs of dramatic improvement in the near-term. Unlike PPG Industries, Sherwin-Williams has put more of a focus on emphasizing its consumer sales opportunities, and that has paid off for Sherwin-Williams during the current economic expansion. If the housing market starts to cool off, however, Sherwin-Williams could find itself at a competitive disadvantage to PPG and other rivals, at least temporarily.
Investors celebrated Sherwin-Williams' profit growth, pushing the stock dramatically higher immediately following its earnings announcement. In the long run, though, Sherwin-Williams will have to take maximum advantage of favorable conditions in its best business segments to sustain its growth and support its stock price.
