Housing recovery debate
Housing recovery has been a point of debate for some time. Both residential and non-residential spending have climbed up as depicted by the rising house prices and Architectural Billing Index (ABI). Some believe that the housing market is on its way to a revival after the housing bubble burst in 2006. On the other hand, many believe that the rest of the economy is teetering away thereby suggesting that the ‘revival’ in housing market might be temporary.
How to check?
The Paints & Coating industry remains one of the main beneficiaries of the housing recovery. Let’s analyze a couple of players to judge whether the recovery is a strong one or not.
Sherwin-Williams Company (NYSE:SHW) is the first name that comes to my mind as soon as I think about paints. The company manufactures and distributes paints through its three core segments: Paint Stores (62% of sales), Consumer (18%), and Global (20%). The company operates more than 3,000 stores worldwide and caters to do-it-yourself (DIY) customers, contractors, and multi-national industrial manufacturers.
Sherwin-Williams Company (NYSE:SHW)’s operations are heavily concentrated in the US (~85% of revenues). The company recently announced its quarterly results. The company topped the earnings estimate but missed the revenue estimate. The below consensus result for revenue tell us that the end markets are not improving for the company according to the market expectations. Also, the EPS beat came from a lower-than-anticipated tax rate, which tells us that the earnings beat has nothing to do with the performance of the company.
The company also issued weak guidance for 2013 (below the Street’s estimate). The sales growth was forecasted to be in 5-9% range as opposed to the Street’s estimate of 8% growth.
While Sherwin has a history of providing conservative guidance that it subsequently exceeds, Sherwin-Williams Company (NYSE:SHW) bulls are likely to be disappointed by the lack of a guidance raise heading into the company’s seasonally strong quarters, especially given Sherwin’s broad appeal for its leverage to a US housing recovery. Therefore, continued weakness in commercial construction and new housing end markets, as well as rising raw material prices, leave me on the sidelines.
Some more players
The Valspar Corporation (NYSE:VAL) is another chemical player that is exposed to construction activity in the US. The company has large positions in both architectural and industrial coatings. In the Paints segment (~40% of sales), Valspar primarily sells architectural paint in North America, China and Australia. In the Coatings segment (~53% of sales), the company supplies coatings to packaging (#1 global supplier), coil, wood (#1 in China) and general industrial end markets. The remainder of sales comes from specialty polymers, colorants and furniture protection.
The company is expected to report its earnings on May 14. The consensus estimates show that the company will make revenue of $1.05 billion and an EPS of $0.91. Again, analysts believe that paint demand remains pressured by the ongoing weakness in the housing market.
However, the stock can’t be called a sell given that the company has a defensive packaging business, which accounts for ~20% of total sales and ~10% of total sales come from China, which could offset potential slowing growth in other industrial markets. Falling petrochemical derivative prices should result in higher margins in 2013.