Sherwin-Williams Sees Better Times Ahead Despite a Tough Quarter

Source: Sherwin-Williams.

Paint-maker and coatings specialist Sherwin-Williams has seen its shares soar in recent years, as the improving housing market has driven demand for its products higher. Yet success often drives investors to boost their expectations and look for even better results in the future. Coming into Thursday morning's first-quarter financial report, Sherwin-Williams investors believed that the company could keep up an aggressive pace of revenue and earnings growth, bolstered by consumers having more discretionary income. Sherwin-Williams disappointed its shareholders with its numbers for the quarter, but an upbeat attitude about the remainder of the year helped to alleviate any longer-term concerns. Let's look at the latest from Sherwin-Williams and what investors should look for during the rest of 2015.

Sherwin-Williams sees its growth get chippedOn their face, Sherwin-Williams' financial results weren't all that bad. Revenue rose 3.5% to a record $2.45 billion, with the company overcoming a hit of more than 3% related to the strong U.S. dollar. Similarly, earnings of $1.38 per share were up 21% from year-ago levels, even as currency impacts cost Sherwin-Williams about $0.04 per share in earnings. Yet the problem is that Sherwin-Williams shareholders had expected even better results, with the consensus figures implying revenue growth of 5.4% and earnings of $1.44 per share.

Looking at the different parts of Sherwin-Williams' business, domestic consumer-facing segments did far better than its industrial-focused businesses. The Paint Stores Group saw sales rise 7.5% to $1.46 billion, with same-store sales figures rising 6.4%. Profits climbed more than 20% as volumes of paint sales rose. Similarly, revenue in the Consumer Group rose 8%, with the rollout of the Lowe's HGTV Home initiative producing greater interest in the company's products.

Source: Sherwin-Williams.

By contrast, international headwinds caused trouble for Sherwin-Williams. The Global Finishes Group saw sales fall 5.6%, with seven percentage points of currency headwinds wiping out what would have been a currency-neutral gain. Similarly, in the Latin America Coatings Group, an almost 9% drop in sales came from a dollar-related hit of 14 percentage points.

Corporate executives celebrated the news despite the mixed results, with CEO Christopher Connor saying, "It is gratifying to report another quarter of record sales and earnings per share." Moreover, Connor sees new store openings and strong operating results as giving Sherwin-Williams the ability to work through currency-related headwinds to prosper.

Can Sherwin-Williams bounce back?More importantly, Sherwin-Williams painted a pretty picture for where it sees itself going forward. In the second quarter, Sherwin-Williams believes sales will jump 6%-8%, with earnings of $3.70-$3.90 per share. That guidance is largely above what investors had expected previously, and the fact that Sherwin-Williams reiterated its full-year guidance shows that even with slightly lackluster results for the first quarter, the company still thinks it can make up the difference with stronger performance in the remainder of the year.

Image: Sherwin-Williams.

Sherwin-Williams also continues to demonstrate its commitment to return capital to shareholders through dividends and share buybacks. The company bought back 2 million shares during the first quarter, and it still has authority to repurchase another 3.23 million shares. At current prices, that means that Sherwin-Williams could commit as much as $900 million toward buybacks, providing a reasonable underpinning of support for the stock price going forward.

The company's opportunity to repurchase shares on the cheap might come sooner than some had anticipated. Investors didn't react favorably to the news, sending Sherwin-Williams stock down about 2.5% in the opening half-hour of trading on Thursday morning. Nevertheless, with the paint-maker having reason to believe that the rest of 2015 will make up for any perceived shortfall on its part to open the year, Sherwin-Williams has the potential to bounce back from a short-term drop and produce better total returns for shareholders this year and beyond.

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