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Sherwin-Williams (SHW) Strikes New 52-Week High at $297.25

Shares of Sherwin-Williams SHW scaled a new 52-week high of $297.25 last Friday before retracing to end the day at $296.98.

The Ohio-based paint giant, which has a market cap of roughly $27 billion, has delivered a year-to-date return of roughly 15%, higher than the S&P 500’s corresponding return of around 0.8%. Average volume of shares traded over the last three months is roughly 956.4K.

What’s Driving SHW?

Sherwin-Williams’ earnings for fourth-quarter 2015 topped the Zacks Consensus Estimate. The company expects consolidated net sales for full-year 2016 to increase by a low-single digit percentage on a year-over-year basis. It expects growth to be driven by the Paint Stores Group, the HGTV HOME paint program, operating efficiencies, improved prices and cost control actions.

Sherwin-Williams follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management, productivity improvement and innovation. It is gaining from continued strength in its paint business, strategic investments and acquisitions. Sherwin-Williams should also benefit from an upswing in the U.S. residential construction market which should drive demand for architectural paints.

The buyout of the U.S. and Canadian businesses of Consorcio Comex S.A. de C.V. has also allowed the company to better serve its customers across some of its key markets. The company should gain from the integration of the acquired Comex operations in 2016.

Moreover, Sherwin-Williams recently agreed to buy rival paints maker Valspar VAL in an all-cash deal worth roughly $11.3 billion (includes assumption of Valspar debt) that would create a premier global paints and coatings company with strong foothold across 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 and bolster its global finishes business. The buyout will also significantly enhance Sherwin-Williams’ competitive profile.

Sherwin-Williams sees $280 million in annual synergies within two years following the closure of the deal and expects the transaction to be immediately accretive to its earnings (barring one-time costs) and significantly enhance its cash flows.

Sherwin-Williams also continues to invest in its Paint Stores Group segment to boost market share. It is also seeing healthy momentum for its HGTV HOME paints at Lowe’s personal stores.

Moreover, Sherwin-Williams remains committed to deliver incremental returns to shareholders leveraging healthy cash flows. The company also expects a year-over-year decline in input costs in 2016 due to lower crude oil prices.

However, Sherwin-Williams’ Latin American operations remain exposed to soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar).

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

Other Stocks to Consider

Better-ranked companies in the basic materials space include Arkema S.A. ARKAY and Sinopec Shanghai Petrochemical Co. Ltd. SHI, both sporting a Zacks Rank #1 (Strong Buy).

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