A Fresh Coat of Record Highs
Now this is interesting -- a company that wasn't doing too well because of pinching input costs is now beating Street estimates with its numbers and forecasting higher sales for the future.
Sherwin-Williams' (NYS: SHW) third-quarter revenues have touched record highs. It seems like the old pass-the-buck strategy is doing the trick for the chemical players. But even so, the cost burden remains high, and all might not be so rosy for Sherwin's forthcoming quarter.
Dipping into the numbers
After a distasteful dip in its second-quarter bottom line, Sherwin has managed to earn higher net profits this time. Its bottom line came in at $179.9 million, up 3% from the year-ago quarter, driven by a growing top line. The company's revenues grew 14.4% from the year-ago period to $2.48 billion.
Although volumes grew, higher selling prices played a big role in generating higher revenues. Sherwin has been raising prices to tackle costs, and both its Paint Stores and Global Finishes segments benefited from this move, thus generating higher revenue and profits. Sherwin peer PPG Industries (NYS: PPG) is witnessing something similar-- its third-quarter revenues got a boost primarily from high prices.
The game isn't over yet
Sherwin's revenues have grown, but there's no respite from high costs yet. The lag between rising raw-material costs and the implementation of price increases has been bothering paint companies as a whole. To top it off, raw-material producers are showing no signs of getting off the price-increase bus yet.
For instance, DuPont (NYS: DD) , which produces important raw materials used in the paint industry, expects its costs to remain high and is therefore announcing price increases that come into effect this month. Huntsman (NYS: HUN) , too, announced further price increases a week back, and there are many similar stories brewing around.
Now, with costs rising continuously, Sherwin has implemented additional price increases this month. Peers like RPM International (NYS: RPM) have also aggressively pursued the price-increase path lately. It will be interesting to see how companies like Sherwin protect margins in this cat-and-mouse game. One positive thing for Sherwin here is the good growth in its organic volumes, which should help keep sales strong.
Sherwin recently announced an additional buyback of around 20 million shares, and it intends to use the cash proceeds for acquisitions and capital expenditures, or even for dividends.
The company also acquired an England-based paint business some months ago, which is expected to add good value to the company's business. Overall, acquisitions contributed 4.1% to Sherwin's total sales increase in its third quarter. Future buyouts should be a thing to watch out for.
Sherwin has been investing in new stores, too. It added 13 locations to its Paint stores group in the third quarter and has plans of adding a total of net 60 new store locations in the year.
The Foolish bottom line
Sherwin's growing top line is a positive sign. I also quite like the company's growth plans and good dividends. But you might remain a little cautious toward its fourth quarter, because the charging of a one-time tax-related amount of around $75 million is expected to dilute earnings a bit.
At the time this article was published Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article.Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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