EUR 850.00 For Business Accounts Only

Morningstar | Sherwin's Price Increases Start to Partially Offset Rising Input Costs; Raising FVE to $360

Having lapped the one-year mark since the acquisition of Valspar, Sherwin is starting to make up ground on persistent input cost inflation and is generating solid same-store-sales figures. The firm realized respectable revenue growth across all segments, despite rising costs as the firm begins the transition toward exclusive paint-aisle sales with Lowe's. While our long-term forecasts are unchanged, we have increased our fair value estimate to $360 per share from $350 due to time value of money effects. Our narrow moat rating is unchanged.

Sherwin's largest segment, The Americas Group, or TAG, increased comparable store sales in North America by 6.8% during the quarter, while Latin American sales were up 4.4%. Having opened an additional 18 net-net stores in the segment, the firm continues to invest in a business that should be well-positioned to benefit from increased levels of homebuilding and remodel activity. Adjusted segment operating margins rose 0.2% to 21.7%, which indicate that Sherwin's efforts to increase prices appear to be going well, despite the sustained rise in input costs. As we forecast oil prices to decline in the coming years, input costs should fall and margins should continue to expand for the segment.

The Consumer Brands Group saw adjusted operating margin slip to 15.4% from 16.2% last year, driven by higher input costs and setup costs related to the transition to the exclusive sale of Sherwin Williams products at Lowe's. These headwinds should fade over the coming quarters as this transition is completed. Performance Coatings drove sales growth of 11% on a pro forma basis, driven by broad-based strength across categories. Sherwin was also able to bring margins back to level with those seen last year, at 14% on a comparable basis, versus the relatively weak first quarter. Though both of these segments will grow slower than TAG, we expect sales to increase roughly 4%-5% per year on a global basis, in line with broader nominal GDP growth.