Sherwin-Williams Finishes 2016 Strong

By Dan Caplinger Markets Fool.com

The U.S. economy has been running strong for eight years now, and that has led consumers to spend more on their homes. That's been good news for paint-maker Sherwin-Williams (NYSE: SHW), which capitalizes on consumer strength through its proprietary paint stores as well as by selling products through other retailers. Coming into Thursday's fourth-quarter financial report, Sherwin-Williams investors were expecting growth trends to continue, and they were largely pleased to see that the company managed to keep up its forward momentum through the end of 2016. Let's take a closer look at Sherwin-Williams to see what it said about its results and what it sees ahead in 2017.

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Image source: Sherwin-Williams.

Sherwin-Williams earns a win

Sherwin-Williams' fourth-quarter results reversed a trend of disappointment that the company had seen in previous quarters. Revenue was up nearly 7% to $2.78 billion, easily outpacing the $2.69 billion in sales that most investors were hoping to see. Net income inched upward by 2.5% to $203 million, but after accounting for special costs such as those related to the Valspar (NYSE: VAL) merger, adjusted earnings of $2.34 per share topped the consensus forecast among investors by $0.13 per share.

Taking a closer look at the company's performance, Sherwin-Williams' success came largely from its paint stores group. Sales growth for the segment jumped almost 10%, with the company attributing gains primarily to higher architectural paint sales volume across all of its end markets. The paint-maker also noted that a change in the way it classifies revenue contributed to gains, but same-store sales were up 5.5% from the year-ago quarter. Segment profit for Sherwin-Williams' paint stores climbed 8%, as margin figures improved after taking the revenue classification changes into account.

Yet other divisions contributed to profitability, even though not all of them had as much success in building revenue. For Sherwin-Williams' consumer group, sales were up just 0.4% during the quarter, as the company still faced unfavorable currency impacts that cost the segment more than a full percentage point of revenue growth. Still, profit for the consumer unit rose 8% on reduced overhead expenses and more efficient operations. Similarly, the global finishes group posted flat sales from the year-ago quarter, but profit jumped by more than a fifth thanks to falling costs of raw materials and tight expense management. In Sherwin-Wiliams' Latin America coatings group, quarterly revenue climbed more than 8%, but intangible asset impairments caused the segment's bottom line to swing to a loss.

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Sherwin-Williams CEO John Morikis was happy with the company's performance, noting that "it is gratifying to report another year of record performances in sales, net income, earnings per share, and earnings before interest, taxes, depreciation and amortization." Morikis pointed to the factors that have helped all of its segments, as well as growth initiatives that added 94 new stores to the company's network of 4,180 stores.

Can Sherwin-Williams paint a pretty picture in 2017?

One thing that Sherwin-Williams investors are looking at closely is the status of the Valspar merger. Morikis believes that the deal will still happen, but as the CEO said, "We now expect a divestiture will be required to gain approval from the [Federal Trade Commission] to complete the acquisition of Valspar." Sherwin-Williams does believe that its planned sale will involve assets generating revenue of less than $650 million, and it hopes it can get the merger done within the next 90 days.

Sherwin-Williams also gave guidance for the coming quarter and full 2017 year. For the first quarter, the company predicted earnings of $1.45 and $1.55 per share, but with a net reduction of about $0.58 per share due to extraordinary items, that guidance was higher than the current $1.95 per share consensus forecast. Similarly, 2017 earnings guidance for between $13 and $13.20 per share looks more favorable compared to the $13.63 per share forecast among investors when you add back $0.60 in net reductions from one-time items.

Sherwin-Williams investors were quite pleased with the company's financial results, sending the stock higher by 6% in pre-market trading following the announcement. If consumer activity continues to remain strong, then Sherwin-Williams could see its business fundamentals continue to improve throughout 2017.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.