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Morningstar | Sherwin-Williams' Sales Growth Will Pick Up in 2019 Following Fall Slowdown; Maintaining FVE

Following Sherwin-Williams' earnings and sales warning earlier this month, there were no major surprises in the fourth-quarter financial results. Sales growth slowed or even declined for segments targeting architectural coatings, while Sherwin's performance coatings segment faced few headwinds. In total, consolidated sales rose just over 2% year on year in the quarter, while adjusted profits declined by just over 2%. With our outlook largely intact, we've left our $360 per share fair value estimate unchanged, along with our narrow moat rating.

The Americas Group and Consumer Brands segments, both focused on architectural coatings, were the hardest hit. While management seemed to lack a firm reason for why the slowdown took place, it has guided toward stronger consolidated sales growth of 4%-7% and adjusted EPS growth of 12.8% for 2019. Although that level of sales growth should be achievable based on our residential and non-residential construction outlooks, we're slightly more skeptical of the anticipated margin gains following more than a year of challenged margins. In the long run, however, we think Sherwin will be able to regain its lost margins through steady price increases once cost inflation abates, as it has in the past.

Performance coatings sales showed no signs of slowing during the quarter, notching nearly 5% in sales growth. However, margins remained pressured, dropping 20 basis points on an adjusted basis to 13.1%. Given that this is a more contract-oriented business, margins will likely remain under pressure until the second half of 2019, when price negotiations begin to take effect. As with the other segments Sherwin will be able to gradually win back margin over the long run.