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Morningstar | Sherwin Williams Overcomes Soft Architectural Demand in the First Quarter of 2019

Sherwin Williams faced tough market conditions to start 2019. With the bulk of Sherwin's business directed at architectural end-markets, soft housing market conditions made organic growth difficult during the first quarter. Existing home sales have been trending lower since early last year, and new home construction declined nearly 10% over the same period. Adverse currency movements were also a headwind during the quarter. However, sales still grew 1.9% to $4.04 billion, and comparable net income per share just barely rose to $3.60. Despite a slightly soft start, we expect the housing market to gradually improve in 2019, which should support Sherwin Williams' targets for the year. With our outlook largely unchanged, we maintain our $360 per share fair value estimate and narrow moat rating.

The Americas Group segment managed solid performance despite a dreary backdrop, with net sales rising 3.6% to $2.15 billion, or just over 5% excluding currency translation effects. However, segment income fell versus the prior year as the company wasn't quite able to offset rising cost, despite increased average prices. The latest removal of sanction waivers for Iranian crude doesn't bode well for resin prices, which tend to move with oil prices. However, Sherwin should be able to widen margins through higher prices later in the year.

The Consumer Brands segment rebounded nicely, with sales up around 4% excluding divestitures and exchange rate movements. Most importantly, margins expanded substantially to 13.4%, up from 11.3% last year. We think margins should continue to exceed those of last year throughout 2019 due to greater cost savings and higher prices. The combination of Valspar and Sherwin has allowed additional back-office savings. Sherwin should also be able to drive higher prices as Lowe's completes its transition to exclusivity with Sherwin's coating products.