Sherwin-Williams Poised On Valspar Buy, FX Woes Linger

On May 27, we issued an updated research report on paint maker Sherwin-Williams (NYSE:SHW) .

Sherwin-Williams’ adjusted earnings and sales for first-quarter 2016 topped Zacks Consensus Estimates. Revenues rose year over year as higher paints sales volumes more than offset unfavorable currency impact.

The company raised its full-year earnings guidance. It now expects 2016 earnings, excluding acquisition costs, in the range of $12.50 to $12.70 per share (up from $12.20–$12.40 per share expected earlier). For 2016, Sherwin-Williams expects consolidated net sales to increase by a low single-digit clip from 2015.

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, in Mar 2016, agreed to buy rival paints maker Valspar (NYSE:VAL) in an all-cash deal worth roughly $11.3 billion. The acquisition (expected to close by the end of first-quarter 2017) 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. The merger would create a premier global paints and coatings company with strong foothold across Asia-Pacific and Europe, the Middle East and Africa (EMEA) regions.

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. The company added 83 net new stores in 2015 to its Paint Stores Group unit, and ended the first quarter with 4,099 stores in operation. Plans are in place to add 90-100 net new stores in 2016. It is also seeing healthy momentum for its HGTV HOME paints at Lowe’s personal stores.

Sherwin-Williams also remains committed to deliver incremental returns to shareholders leveraging healthy cash flows. Moreover, the company expects a year-over-year decline in raw materials costs in 2016. Sherwin-Williams should also benefit from an upswing in the U.S. residential construction market which should drive demand for architectural paints.

However, Sherwin-Williams’ Latin American operations remain exposed to soft end-market demand and unfavorable currency translation (stemming from a strong U.S. dollar). Currency translation reduced sales from the company’s Latin American operations by roughly 22% in the first quarter.

Currency swings also had an unfavorable impact of around 5% on sales from the company’s Global Finishes Group unit in the quarter. Sherwin-Williams is expected to continue to face currency headwind and soft demand in its Latin American markets in the near term.

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

Stocks to Consider

Better-ranked companies in the basic materials space include Akzo Nobel N.V. (OTC:AKZOY) and Koninklijke DSM N.V. (OTC:RDSMY) , both holding a Zacks Rank #1 (Strong Buy).