Today, we're putting another housing-related concern in the spotlight in the form of paint manufacturer and distributor The Sherwin-Williams Company (NYSE:SHW). The stock had a rough ride in the second quarter where it fell back some 15% and the equity is now down some 5% for 2024. Time to buy the dip in this underperformer or more downside to come? An analysis follows below.
The Sherwin-Williams Company is headquartered in Cleveland, OH. The company manufactures and distributes paints, coating, and related products through just over 5,000 company stores in North America, Latin America and the Caribbean. It also sells performance coatings to a wide variety of industrial users. The stock currently trades around $295.00 a share and sports an approximate market capitalization of $75 billion. The company operates via three primary business segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group. They break down as following using FY2022 sales.
Recent Results:
The company posted its Q1 results early in the earnings season on April 23. The company delivered non-GAAP earnings of $2.17 a share, a nickel a share below expectations. Revenues fell just over 1% on a year-over-year basis to $5.37 billion. This missed the top-line consensus by some $130 million.
It's not hard to see where the company is having problems at the point. Its Paint Stores Group saw revenue growth of just a half percent from the same period a year ago, down from the mid-teens it experienced in 1Q2023. The tepid housing sector is a considerable headwind as existing home sales in 2023 came in at their lowest levels since 1995 thanks to mortgage rates that have more than doubled since the central bank started to lift the Fed Funds rate in March of 2023 after a decade and a half of largely ZIRP in place.
The consumer is also under considerable stress. The huge excess savings from COVID relief programs have been spent. The personal savings rate is about half of what it was pre-pandemic, and the unemployment rate has ticked up from 3.5% to 4%. Both Home Depot (HD) and Lowe's Companies (LOW) noted their consumers were postponing more big ticket items like appliances. It's only logical to assume more consumers are pushing off repainting their abodes as well.
Consumer Brand sales were down just over 7% on a year-over-year basis and revenues from Performance Coatings were off 1.6%. On a brighter note, thanks to cost cutting and efficiencies in those two groups, overall gross margin rose 270bps from the same period a year ago to 47.2%. Leadership also reaffirmed FY2024 non-GAAP earnings guidance of between $10.85 to $11.35 a share.
Analyst Commentary and Balance Sheet:
The current analyst view on the company is somewhat mixed right now. Since Q1 numbers hit the wires, six analyst firms including Barclays and Wells Fargo have maintained/assigned Hold or Sell ratings on the stock. Meanwhile, a dozen analyst firms including Citigroup, Morgan Stanley have reissued/assigned Buy or Outperform rating on the stock. These bullish analysts have price targets in the range of $315 to $400 a share on SHW.
There was a rash of insider sales involving several company officers between Feb. 21 and March 13 at an average price in the high $320s. Collectively, they disposed of just over $10 million worth of shares. That has been the only insider activity in the shares so far in 2024. According to the 10-Q filed for the first quarter, Sherwin-Williams had $180 million of cash and marketable securities on its balance against just over $8.1 billion in long-term debt and more than $1.25 billion in short-term borrowings. The company used a net of $58.9 million of operating cash in the first quarter, primarily due to seasonal increases in working capital requirements.
The company returned $728 million to shareholders in the first quarter via share repurchases and dividend payouts (the shares yield just under one percent currently). This was up 59% from the same period a year ago.
Conclusion:
The Sherwin-Williams Company made $10.36 a share on $23.05 billion worth of revenue in FY2023. The current analyst firm consensus has this well-known paint supplier ringing up profits of $11.39 a share on $23.6 billion of sales in FY2024. They project earnings of $12.74 a share in FY2025 on 4% to 5% revenue growth in FY2025.
Even after the recent fall in the stock, it's hard to get excited about Sherwin Williams' near-term prospects from an investment perspective. The stock trades at 26 times forward earnings, which is a premium to the 22 times forward earnings the S&P 500 trades at in what's an overbought market, in my opinion. Assuming 10% earnings growth, that equates to a PEG of 2.6X. A 1% dividend yield is also hardly enticing given short-term treasuries yield north of 5.3%.
Finally, the company would seem better served to pay down its debt load rather than buy back shares at these trading levels. The bottom line is until the housing sector improves, and the consumer faces fewer headwinds, it's hard to see any value in SHW at this point in time.