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Sherwin-Williams (SHW): What Awaits this Earnings Season?

Sherwin-Williams SHW is set to release first-quarter 2016 results before the opening bell on Apr 21.

In the last quarter, the coatings and paints company delivered a positive earnings surprise of 11.58%. Earnings surged 54.7% year over year in the quarter, driven mainly by improved operating results in the Paint Stores and Consumer Groups units. Sherwin-Williams has beaten the Zacks Consensus Estimate in two of the trailing four quarters with an average beat of 2.91%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Sherwin-Williams follows a strategy of growth through acquisitions and internal initiatives such as efficient working capital management and innovation. This enables the company to somewhat reduce its dependency upon prevailing market conditions.

Sherwin-Williams has agreed to buy rival paints maker, Valspar in an all-cash transaction that would create a premier global paints and coatings company with strong foothold across the 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.

Sherwin-Williams expects consolidated net sales in the first quarter of 2016 to increase by a low single-digit percentage on a year-over-year basis. At this level, the company anticipates earnings in the band of $1.50–$1.65 per share for the first quarter compared with $1.38 earned a year ago.

For full-year 2016, Sherwin-Williams expects consolidated net sales to increase by a low-single digit percentage on a year-over-year basis. At this level, the company anticipates earnings for full-year 2016 in the band of $12.20–$12.40 per share compared with $11.16 per share earned in 2015.

Sherwin-Williams’ aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits.

However, Sherwin-Williams’ consumer and paint stores businesses still remain impacted by the global economic weakness. Although domestic demand of architectural paint has improved, it remains weak outside North America due to sluggish market conditions and currency headwinds, mainly in Europe and the Latin American countries.

Sherwin-Williams’ Latin American operations are also facing soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar).

Earnings Whispers

Our proven model shows that Sherwin-Williams is likely to beat earnings this quarter because it has the right combination of two key ingredients.  

Zacks ESP:  Earnings ESP for Sherwin-Williams is +3.07%. This is because the Most Accurate estimate stands at $1.68, while the Zacks Consensus Estimate is pegged at $1.63. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.  

Zacks Rank: Sherwin-Williams has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. Conversely, Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.  

Stocks that Warrant a Look

Here are some companies in the basic materials sector you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Barrick Gold Corporation ABX has an Earnings ESP of +11.11% and a Zacks Rank #3.

Agnico Eagle Mines Limited AEM has an Earnings ESP of +50% and a Zacks Rank #3.

Air Products and Chemicals, Inc. APD has an Earnings ESP of +0.56% and a Zacks Rank #2 (Buy).

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SHERWIN WILLIAM (SHW): Free Stock Analysis Report
 
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