Morningstar | Sherwin-Williams Shares Decline as Investors React to High One-Time Costs and Margin Pressure
Sherwin-Williams reported middling third-quarter results, with consolidated sales increasing 5% from a year earlier. However, implementation costs for the Lowe’s exclusivity deal once again weighed on investors’ minds, driving the stock down after the release. Unsurprisingly, input cost inflation pressured operating margins yet again. Management narrowed its 2018 earnings per share guidance to $19.05-$19.20, a $0.15 decrease from the upper bound of previous guidance.We’ve slightly trimmed our expectations for 2018, given the sustained upward pressure in input costs and lag in passing on higher prices to consumers. However, our long-term outlook is unchanged, along with our $360 fair value estimate and narrow moat rating.
The Americas group segment reported 5% comparable-store sales growth from the year prior. Latin America sales decreased by the low double digits due to currency headwinds. This is a business that should continue to benefit from increased homebuilding and remodeling activity. Segment operating margins increased to 21.7% from 20.7% a year earlier. Over the long term, we expect falling oil prices, which should decrease input costs and boost margins for Sherwin.
The consumer brands segment reported increased sales, with adjusted operating margins decreasing to 16.9% from 17.3% in the prior year. The decrease can be attributed to higher costs related to the exclusivity deal with Lowe’s. These headwinds will wane as the transition wraps up. The performance coatings group reported improved operating profit and operating margin compared with last year, though sales growth has decelerated. Within the segment, strength in the industrial, packaging, and coil divisions was offset by the performance of the automotive refinished business and industrial wood business. We expect long-term sales growth to remain roughly in line with GDP, given the broad category exposures in both segments.
Sherwin-Williams is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to industrial, commercial and retail customers. The company's segments are: The Americas Group, which markets and sells Sherwin-Williams? and other controlled brand architectural paint and coatings, protective and marine products, OEM product finishes and related products; Consumer Brands Group, which supplies architectural paints, stains, varnishes, and industrial products, among others; and Performance Coatings Group, which develops and sells industrial coatings, automotive refinish, protective and marine coatings, coil coatings, packaging coatings and resins and colorants.
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