Sherwin-Williams' Record Results Still Look Ugly to Investors

Image: Sherwin-Williams.

The booming housing market has lifted the prospects of companies throughout the sector, and as a maker of paint and other coatings used in part for home maintenance and upkeep, Sherwin-Williams has participated in the strong performance of housing-related stocks in recent years.

Coming into Thursday morning's second-quarter financial report, though, Sherwin-Williams investors were nervous about the company's failure to live up to their expectations and wanted to see truly exceptional growth from the paint specialist. As we saw last quarter, Sherwin-Williams wasn't able to give its shareholders everything they wanted to see, even though the company still believes that its long-term prospects are sound. Let's take a closer look at what Sherwin-Williams had to say and what lies ahead for the company going forward.

Did Sherwin-Williams shareholders expect too much? Sherwin-Williams' second-quarter results actually looked quite impressive when you ignore what investors had wanted to see. Revenue climbed nearly 3% to $3.13 billion, setting another quarterly sales record. Net income soared 20% to nearly $350 million, resulting in diluted earnings of $3.70 per share, up from last year's $2.94 per share result.

Yet Sherwin-Williams investors had hoped for much better growth. The average analyst estimate had called for sales growth of more than 7% and earnings of $3.81 per share.

As we've seen in past quarters, Sherwin-Williams' various divisions encountered much different levels of success. Domestically, Sherwin-Williams did quite well, with the Consumer Group seeing the biggest sales growth at 13% thanks to the early success of its HGTV Home brand of paint products. The Paint Stores Group also experienced solid growth, with revenue rising 5.4% to $1.98 billion on the back of higher paint-sales volumes, especially in the architectural-paint arena. Comparable-store sales rose 3.9%, slowing from last quarter's 7.4% pace but still giving Sherwin-Williams additional support.

Sherwin-Williams' international divisions didn't fare as well, once again plagued by the strong dollar. The Global Finishes Group suffered a drop of more than 7% in sales, even though profit actually climbed slightly from year-ago levels. The Latin America Coatings Group took an even bigger hit, seeing sales plunge 17% as higher raw-material costs outweighed efforts to boost product prices.

Even though Sherwin-Williams didn't match the high expectations that investors had this quarter, the company remains excited about its record results. As CEO Christopher Connor noted, "It is gratifying to report another quarter of record sales and earnings per share," pointing to the HGTV Home rollout and the company's efforts to become more efficient operationally as laying the foundation for the company's results.

What's next for Sherwin-Williams?Yet investors might well be dissatisfied with the guidance that Sherwin-Williams gave for the future. For the third quarter, Sherwin-Williams is looking for sales growth of just 3% to 5%, which again will fall well below the 7% growth rate that investors want to see. Earnings of $3.75 to $3.90 per share would also be well short of the current $4.14 per share consensus figure among those following the stock.

Moreover, Sherwin-Williams marked down its full-year guidance as well. The company now expects earnings in the range of $10.60 to $11 per share, down from its previous expectations for between $10.90 and $11.10 per share. Full-year revenue growth in the 3% to 5% range will also be less than what investors had hoped to see.

Nevertheless, Sherwin-Williams is still taking steps to bolster its future potential while rewarding shareholders. The company raised its store count by 22 locations in the Paint Stores Group during the first half of 2015, helping to drive revenue growth beyond what same-store sales gains can produce.

At the same time, Sherwin-Williams kept buying back its stock during the quarter, although the pace of its repurchases slowed considerably. After repurchasing 2 million shares during the first quarter, it bought back roughly 250,000 shares in Q2. The company still has authorization to repurchase almost 3 million more shares, giving it further ammunition if it wants for future buyback activity.

Investors weren't happy with Sherwin-Williams' results, sending the stock down more than 6% as of late Thursday morning. With the stock trading at a relatively high valuation, the paint-maker could see further short-term weakness if investors start to ramp down their future expectations for the company. In the long run, though, Sherwin-Williams' prospects remain sound, especially as long as the U.S. housing market remains healthy.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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