Can Sherwin-Williams' (SHW) Q2 Earnings Pull A Surprise?

Sherwin-Williams (NYSE:SHW) is set to release second-quarter 2016 results before the bell on Jul 21.

Last quarter, the coatings and paints company delivered a positive earnings surprise of 11.04%. Earnings surged 31.2% year over year in the quarter, mainly driven by improved operating results in the Paint Stores group. Notably, Sherwin-Williams has beaten the Zacks Consensus Estimate in three of the trailing four quarters with an average beat of 5.84%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Sherwin-Williams follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management and innovation. This enables the company to somewhat reduce its dependence upon prevailing market conditions.

Sherwin-Williams has agreed to buy rival paints maker, Valspar (NYSE:VAL) in an all-cash transaction that would create a premier global paints and coatings company with strong foothold across the Asia-Pacific and Europe, the Middle East and Africa (EMEA) regions. The acquisition will allow Sherwin-Williams to strengthen its position as a leading paints and coatings provider globally, leveraging highly complementary offerings, strong brands and technologies.

Valspar is a strategic fit and the merger will extend Sherwin-Williams’ brand portfolio and customer relationships in North America, apart from bolstering its global finishes business. Sherwin-Williams is focusing on increasing cash on its balance sheet for the buyout and to service debt after the purchase. This will considerably reduce its share repurchases. Shareholders of Valspar have approved the proposed transaction.

Sherwin-Williams expects consolidated net sales in the second quarter of 2016 to increase by a low to mid single-digit percentage on a year-over-year basis. At this level, the company anticipates earnings in the band of $3.95–$4.15 per share for the second quarter compared with $3.77 per share earned a year ago.

For full-year 2016, Sherwin-Williams expects consolidated net sales to increase by a low-single digit percentage on a year-over-year basis. At this level, the company anticipates earnings for full-year 2016 in the band of $12.50−$12.70 per share compared with $11.16 per share earned in 2015. This expectation is higher than the previously stated guidance range of $12.20–$12.40 per share.

Sherwin-Williams’ aggressive cost control initiatives, working capital reduction, supply chain optimization and productivity improvement should continue to yield margin benefits. The company’s Consumer segment is recovering, with improving domestic as well as international sales of automotive finishes, original equipment manufacturers’ product finishes, and protective and marine coatings.

However, Sherwin-Williams’ consumer and paint stores businesses still remain impacted by the global economic weakness.

Sherwin-Williams’ Latin American operations are also facing soft end-market demand and unfavorable currency translation (stemming from a strong U.S. dollar). Currency headwinds may continue to hurt in its Latin American business in the June quarter.

SHERWIN WILLIAM Price and EPS Surprise

SHERWIN WILLIAM Price and EPS Surprise | SHERWIN WILLIAM Quote

Earnings Whispers

Our proven model does not conclusively show that Sherwin-Williams is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Both the Most Accurate Estimate and the Zacks Consensus Estimate are at $4.18. This lack of difference leaves the ESP at 0.00%.

Zacks Rank: Sherwin-Williams carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s ESP of 0.00% makes surprise prediction difficult.

Stocks that Warrant a Look

Here are some companies in the basic materials sector you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntsman Corporation (NYSE:HUN) has an Earnings ESP of +7.84% and a Zacks Rank #1.

FMC Corp (NYSE:FMC) has an Earnings ESP of +4.48% and a Zacks Rank #2.