Sherwin-Williams Company (NYSE: SHW). The company’s 3Q20 results were exceptionally strong, beating both our quarterly estimate as well as consensus forecast quite handily, as continued strength in the Do-It-Yourself, residential and industrial coating businesses drove stronger top-line and bottom-line growth. We believe that Sherwin-Williams remains well positioned as the U.S. housing recovery matures, home owners seek to improve the value of existing homes, and contractors build new homes.
In addition, despite ongoing disruption from the pandemic, the company’s gross margins showed resilience in 3Q, rising 220 basis points on a strong product mix and lower raw material costs. We expect results to continue throughout the fourth-quarter and through 2021.Over the long term, we also expect the company to benefit from its dominant position in the U.S. architectural paint market and from its integration of Valspar, which was acquired in 2017.
On October 27, Sherwin-Williams reported an adjusted 3Q20 net profit of $764 million or $8.29 per diluted share.
The higher year-over-year earnings reflected stronger operating profits in all business segments, with particular strength in the Consumer Brands Group, partly offset by the impact of COVID-19. Consolidated net sales increased 5% from the prior year to $5.122 billion and beat the StreetAccount consensus of $5.070 billion.
The 3Q20 consolidated gross margin was 47.9%. The improvement was largely attributable to a stronger product mix and lower raw material costs. SG&A expense rose 5% to $1.407 billion, but fell to 27.5% of sales from 27.6% in the prior-year quarter.
As a result of the Valspar acquisition, Sherwin-Williams has changed its reporting structure.
In the Americas Group, revenue increased 3% from the prior year to $2.98 billion, while operating profit improved to $747 million. The segment gross margin rose to 25.1% from 22.9% on a favorable product mix and strong cost controls.
In the Performance Coatings Group, revenue rose 1% to $1.31 billion.
EARNINGS & GROWTH ANALYSIS
Along with its 3Q20 earnings release, the company provided updated full-year guidance. SHW now expects net sales to be approximately 3%-7% higher than the fourth-quarter of 2019. In addition, it has raised its adjusted EPS guidance to $24.00-$24.30 from $21.75-$23.25, helped by higher volume and positive pricing effects.
The consensus forecast is $24.08.
FINANCIAL STRENGTH & DIVIDEND
Fitch rates the company’s debt at BBB/negative.
Sherwin-Williams suspended share buybacks from March 2016 to June 2017 as it pursued the Valspar acquisition. However, following the completion of the merger, it resumed its buyback program and repurchased 1.075 million shares in 2Q19. We believe that SHW has paused share repurchases with the ongoing COVID-19 but will return shortly to completing this authorization.
On February 19, 2020, Sherwin-Williams raised its quarterly dividend by 19% to $1.34 per share, or $5.36 annually. Going forward, the company anticipates a dividend payout of about 30% of prior-year earnings.
MANAGEMENT & RISKS
John Morikis succeeded Christopher Connor as the company’s CEO on January 1, 2016, following more than nine years as president and COO (he retains the title of president). Mr.
Sherwin-Williams is the largest U.S. producer of paint. The company operates over 4,100 retail stores and supplies coatings directly to retailers, distributors, industrial & commercial customers and other industry professionals. The company acquired Valspar in 2017.