Market Overview

Sherwin-Williams Earnings Paint a Bad Picture, But There's More to the Story


Sherwin-Williams (NYSE: SHW) shocked investors and analysts alike with low earnings on higher-than-expected revenues, causing a sharp drop in early trading shortly after the company reached its 52-week high. The stock is now down slightly from yesterday's close, and a further drop may be forthcoming as investors react to the disappointing news.

The paint company's earnings were just 14 cents per share, despite analysts' expectations of 83 cents per share. Revenues for the quarter were $2.07 billion, slightly higher than estimates of $2.05 billion.

If the company took in more money, why were its profits so low? The company posted a net income loss of $11.4 million due to unidentified "other" expenses--up over $10 million from the same period in 2010--and its tax expenses skyrocketed by 70 cents per share thanks in part to a settlement with the IRS over unpaid taxes relatied to employee-owned shares. In total, the company paid $115 million in taxes, which obliterated the company's income of $129.5 million.

If this were the company's fixed tax rate, it would be 88.7%. Of course, this is far from the company's normal rate (it paid a bit over 29% for the same quarter of 2010), so investors would be wise to look at revenue and pre-tax income before writing off Sherwin-Williams as a dud.

The company's pre-tax income is a 25% increase on last year's earnings of $103.7 million, and the company's annual earnings of $741 million (an increase of 9.4%) signal growth for the company. So does growth in revenue, which is up by 9.23% in Q4 2011 from last year's figures. The jump in revenue is important because worries have loomed over the firm after Wal-Mart (NYSE: WMT) dropped the company's paint at the end of 2010, choosing instead Akzo Novel NV's (AMS: AKZA) Glidden as the sole paint brand to be sold in its stores. The Dutch company's stock price is down over a percent since the announcement was made in 2010.

Worries that Sherwin-Williams would fail to sell its paint were unfounded, as the company's Paint Stores group has seen a steady rise in paint sales, which jumped from $999 million to $1.13 billion from 2010 to 2011. The growth in paint sales offset a slight decline in the company's Consumer Group, while international growth helped the firm's Global Finishes Group jump by 7.5% to $463 million.

The Global Finishes group was split from the company's other operations so that the company could report its Latin America figures separately. This number has disappointed in the past and it disappoints again. Last quarter's $39 million profit fell to only $26 million profit on sales of $220 million thanks in part to rising commodity costs. However, the figure has also been hit by acquistions, which may help the company grow more quickly in the future.

Despite some steady growth, there are worrying signs from the the company's statements, particularly from its selling, general and administrative expenses figure, which is up from $720.3 million to $753.9 million. This hit the company's profit margin, which is down slightly from 44.6% to 42.8%.

As a steady and consistent performer, Sherwin-Williams has been a favorite dividend play, although a yield of 1.52% on the stock's current share price makes it a less appealing draw than many other dividend payers. However, the stock's price has been rising steadily since 2008, and with rising revenues and a strong market presence despite a decoupling with Wal-Mart, the company has proven itself to be a consistent performer no matter what the market throws at it. It's no surprise that investors are not turning away from the company despite the disappointing results, but investors should also remember that there are other attractive plays in the sector. Both PPG Industries (NYSE: PPG) and Akzo Nobel have shown signs of strength in recent months, and both offer dividends significantly higher than Sherwin.

Posted-In: Earnings News Best of Benzinga


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