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What Did Sherwin-Williams Company (SHW)’s Investor Day Tell Us?

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Sherwin-Williams Company (NYSE:SHW)’ recent investor day has sent bullish signals to the market. The optimism is to be seen not only in the company’s story but also in the overall industry. Given the recent news on sluggish improvement in non-residential construction markets (shown by the Architectural Billing Index), many had turned bearish on this industry.

Sherwin-Williams Company

However, Sherwin-Williams Company (NYSE:SHW)’s investor day left us with four key takeaways. The strength in the industry will be driven by:

1.) Increasing volumes

2.) Moderating raw material prices

3.) Growth effects of newly acquired businesses

4.) Effects of industry consolidation

Volume momentum is boosted by a strong cyclical architectural paint rebound. There is no doubt that the progress in non-res markets has been below par, but current US paint volumes are still near trough levels. And as they cyclically recover over the next three years, the coating space should see outsized earnings growth.

Raw material cost pressure has eased and could start to reverse (if the Street is right on the TiO2 outlook). For those who don’t know, Titanium oxide, or TiO2, is one of the most essential ingredients in paint making. Prices of TiO2 have started a decline toward record levels.

All three major coating companies have made major strategic moves in the last year: a.) Sherwin-Williams Company (NYSE:SHW) is in the process of acquiring COMEX; b.) The Valspar Corporation (NYSE:VAL) acquired ACE Hardware business, launched paint lines at B&Q in Europe, and took over a paint line in Lowe’s Companies, Inc. (NYSE:LOW); c.) PPG Industries, Inc. (NYSE:PPG) has acquired the North American Glidden brand business from Akzo.

Investment thesis

Looking forward, the earnings trajectory for Sherwin-Williams Company (NYSE:SHW) is positive given the company’s outsized leverage to a U.S. housing recovery. The COMEX acquisition, when completed, should further cement Sherwin-Williams Company (NYSE:SHW)’s footprint in two key architectural coatings markets (Latin America and North America). The environment for Sherwin-Williams Company (NYSE:SHW)’s stock should continue to be favorable in Q2 on easing raw-material prices (both TiO2 and propylene) as well as some possible pent-up demand from a cold winter in the Northern portions of the United States.

The Valspar Corporation (NYSE:VAL) – growing from acquisitions

The Valspar Corporation (NYSE:VAL) remains on track to achieve $400 million in incremental revenue by 2015 from new business wins, predominantly from B&Q, Lowe’s Companies, Inc. (NYSE:LOW) (Valspar Pro) and the Ace acquisition. The potential contribution of these businesses can already be seen in Q1, as it was largely Valspar Pro and Ace which boosted sales in the company’s paint segment.

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