Sherwin-Williams Poised On Valspar Buyout, Risks Remain

On Aug 22, we issued an updated research report on paint maker Sherwin-Williams (NYSE:SHW) .

Sherwin-Williams’ adjusted earnings for second-quarter 2016 missed the Zacks Consensus Estimate. Revenues rose year over year as higher paint sales volumes in the company’s Paint Stores Group unit more than offset unfavorable currency impact. Sales, however, trailed expectations.

Sherwin-Williams expects consolidated net sales to increase at a low to mid-single digit clip year over year in the third quarter. The company anticipates earnings per share for the quarter to be in the range of $4.10–$4.30 per share.

Sherwin-Williams follows a strategy of growth through acquisitions and strategic actions such as productivity improvement, efficient working capital management and innovation. The company is gaining from continued strength in its paint business.

Sherwin-Williams, in Mar 2016, agreed to buy rival paints maker Valspar (NYSE:VAL) in an all-cash deal worth roughly $11.3 billion. Valspar's shareholders voted in favor of the deal at the company’s Special Meeting of Shareholders in Jun 2016.

The planned acquisition (expected to close at the end of the first quarter of calendar year 2017) will allow Sherwin-Williams to reinforce 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 and bolster its global finishes business. The buyout will also significantly enhance Sherwin-Williams’ competitive profile. The merger would create a premier global paints and coatings company with strong foothold across Asia-Pacific and Europe, the Middle East and Africa (EMEA) regions. Sherwin-Williams expects $280 million in annual synergies within two years following the closure of the deal.

Sherwin-Williams also continues to invest in its Paint Stores Group segment to boost market share. The company added 45 stores during first-half 2016 to its Paint Stores Group unit, and ended the second quarter with 4,117 stores in operation. Plans are in place to add 90-100 net new stores in 2016.

Sherwin-Williams also remains committed to deliver incremental returns to shareholders leveraging healthy cash flows. The company raised its quarterly dividend by 25% to 84 cents per share during the second quarter.

However, Sherwin-Williams still faces currency headwinds. Currency translation reduced sales from the company’s Latin American operations by roughly 16% in the second quarter. Currency also had an unfavorable impact of around 3% on sales from the company’s Global Finishes Group unit in the quarter.

Sherwin-Williams’ Latin American operations also remain exposed to soft end-market demand. The company is seeing lower sales volumes in most Latin American markets. Sherwin-Williams is expected to continue to face currency headwind and weak demand in its Latin American markets in the near term.

Sherwin-Williams is a Zacks Rank #3 (Hold) stock.

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Better-ranked companies in the basic materials space include Innospec Inc. (NASDAQ:IOSP) and Innophos Holdings Inc (NASDAQ:IPHS) , both sporting a Zacks Rank #1 (Strong Buy).