Sherwin-Williams (SHW) Q1 Earnings: What's In The Cards?

Sherwin-Williams Company (NYSE:SHW) is set to release first-quarter 2017 results ahead of the bell on Apr 20.

In the last quarter, the paints and coatings company delivered a positive earnings surprise of 5.41% by posting adjusted earnings of $2.34 per share. The adjusted earnings beat the Zacks Consensus Estimate of $2.22.

Sherwin-Williams recorded net sales of $2,782.6 million in the quarter, marking a 6.8% year-over-year rise. Revenues beat the Zacks Consensus Estimate of $2,688 million.

Increased sales volume in the Sherwin-Williams’ Paint Stores Group and changes in revenue classification led to higher sales, partly offsetting the impact of unfavorable currency translation. Sherwin-Williams beat the Zacks Consensus Estimate in two of the trailing four quarters with an average beat of around 2.82%.

Can Sherwin-Williams surprise investors again or is it heading for a possible pullback? Let’s see how things are shaping up for this announcement.

Factors to Consider

Sherwin-Williams expects net sales to increase by mid-to-high single digit percentage year over year for first quarter 2017. The company expects earnings per share in the range of $1.45-$1.55 for the quarter, compared to $1.75 in the year-ago quarter. First-quarter earnings include anticipated costs of 69 cents per share related to proposed acquisition of Valspar Corp. (NYSE:VAL) and 11 cents related to decrease in income tax provision.

The company expects favorable demand for paint and coatings in most domestic markets in 2017. Sherwin-Williams remains focused on capturing a larger share of end-markets and plans to add about 90-100 additional stores in 2017.

The company plans to grow through acquisitions, innovations, and diversification of customer-base, as well as expanding operations in various regions. These initiatives enable the company to somehow reduce dependency upon prevailing market conditions. Aggressive cost control measures, supply chain optimization, working capital reductions and productivity improvement strategies should also continue to boost margins.

The company had cash on hand of about $889.8 million at the end of 2016, which it aims to deploy strategically to fund Valspar acquisition. It also remains committed to increase shareholders value through dividend payouts. The company has increased its quarterly dividend payout to 85 cent per share.

Sherwin-Williams’ shares have also rallied around 9.9% over the past three months, outperforming the Zacks categorized Paints & Allied Products industry’s 6.9% gain.

However, the company still remains exposed to volatility in raw material costs, primarily for titanium dioxide (TiO2), a key paint pigment. It expects higher year-over-year raw materials costs in 2017 with most of the inflation is expected to come from TiO2. The input costs for the paint and coatings industry are expected to be up in the low-single digits range in 2017.

The termination date of the proposed merger between Sherwin-Williams and Valspar, which is currently awaiting regulatory approvals, has been recently extended to Jun 21 from Mar 21. The extension provides sufficient time to complete the merger by addressing necessary regulatory concerns.

On Apr 12, Sherwin-Williams and Valspar entered into definitive agreement with Axalta Coating Systems to divest Valspar's North American Industrial Wood Coatings business assets to Axalta for $420 million in cash.

The companies are divesting the business to Axalta in regard to reviews by the Canadian Competition Bureau (CCB) and Federal Trade Commission (FTC) for the planned merger. Sherwin-Williams said that it can now move ahead to obtain the necessary approvals for acquiring Valspar as the divestiture addresses regulatory concerns appropriately. We expect an update on the merger in its first-quarter earnings call.

Earnings Whispers

Our proven model does not conclusively show that Sherwin-Williams is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP for Sherwin-Williams is currently pegged at -0.97%. This is because the Most Accurate estimate is $2.05 and the Zacks Consensus Estimate is $2.07. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Sherwin-Williams currently carries a Zacks Rank #2, which when combined with a negative ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

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

The Chemours Company (NYSE:CC) has an Earnings ESP of +4.08% and carries a Zacks Rank #1.

The Mosaic Company (NYSE:MOS) has an Earnings ESP of +10% and carries a Zacks Rank #2.

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