RBC On Sherwin-Williams: Buy The Post-Earnings Dip

RBC said the 5 percent drop in Sherwin-Williams Co's SHW shares post Q2 earnings offers an attractive opportunity to buy the stock.

"We remain confident that SHW can continue to grow topline in the 5-8% range and EBITDA in the 15-17% range," analyst Arun Viswanathan wrote in a note.

Viswanathan, who maintained his Outperform rating and $335 price target on the stock, said the company's growth profile should ultimately lead to multiple expansion.

RBC conducted investor meetings with the company management. The company said it believes its Paint Stores group (about 65 percent of total company sales) can continue to grow organically at 1.5-2x the market or 5-6 percent annually due to continued contractor share gains.

The management also reiterated its new store growth target of 90-100 net new stores per year, which adds another 1 percent to topline.

"With its strong focus on execution, working capital optimization, pricing and growth in its (highest margin) Paint Stores group, we see continued gross margin growth," Viswanathan highlighted.

Meanwhile, the company said the acquisition of The Valspar Corp VAL remains on track to close in the first quarter with no or minimal divestitures.

"With the addition of VAL's packaging and coil coatings businesses to its portfolio, SHW believes its total percent of sales with "competitive advantage" should increase from 62-63% currently (Paint Stores) to 71% post merger," Viswanathan continued.

Moreover, the analyst noted that Sherwin-Williams should continue to experience a growing raw materials tailwind in 2016 due to lower TiO2 and oil-based input costs.

"We believe SHW offers the best way to play the nascent recovery in construction markets (>70% of sales/EBIT tied to US construction)," Viswanathan added.