Ahead of Sherwin-Williams Company (NYSE:SHW) reporting its figures for the first quarter, Nomura Holdings, Inc. (ADR) (NYSE:NMR) showed optimism and changed the stock’s rating to a buy. Afterwards, the company issued its earnings, which were so positive that the stock shot up and is expected by the analyst to stay high for rest of the year.
But did Sherwin-Williams Company (NYSE:SHW)’s figures really merit that reaction? While its competitors are flogging paint pots like there’s no tomorrow, the company is recouping after the shock of losing a big client. How will Sherwin-Williams move forward? Is it fighting a losing battle?
Not good enough
In the first quarter, Sherwin-Williams Company (NYSE:SHW) showed a 1.4% increase in sales, compared to the previous year. Comparable-store sales (statistics used in the retail industry, which compare sales of stores that have been open for at least 12 months), were slightly higher at 3.2%. But the figures were not as good as they could have been.
Strong competition
Previously, RPM International Inc. (NYSE:RPM) revealed excellent figures to the market – and performance was much better than Sherwin-Williams’ results – so Sherwin needs to start catching up. If we look at the first-quarter sales for RPM, they have increased by 9%. And as for net profits, RPM International Inc. (NYSE:RPM)’s have risen 31% year-over-year.
Taking advantage of the housing industry
One explanation for RPM International Inc. (NYSE:RPM)’s success could be that its industrial market presence is greater than Sherwin’s. More than 65% of RPM’s revenue comes from the company’s industrial segment, which is also its biggest. In this division, sales saw 6.1% growth in the quarter and acquisitions added around 4% to this.
There is also movement in the construction industry’s commercial side, and this could also be helping to increase RPM’s sales. In commercial construction, the US total spend in February rose by 3.2%, compared to the same period the previous year. But if we look at Sherwin-Williams, more than 60% of its sales can be attributed to consumers.
Retail race
The bottom line is that RPM also outran Sherwin on the retail side. RPM’s retail customers were to thank for the extraordinary 15% bump in sales. This is notably better than the 4.2% sales increase that Sherwin-Williams Company (NYSE:SHW)’ paint stores were getting. And once more, due to acquisitions, another 11% could be added on to RPM’s list of achievements.
So in the paints market, RPM is moving along in leaps and bounds, especially thanks to its latest acquisitions, and Sherwin should be concerned. Plus there’s even worse news of Sherwin-Williams. RPM is by no means all it has to worry about, because there are other companies moving in to grab more pieces of the market.
Major client loss
There is one major factor that has contributed to Sherwin-Williams Company (NYSE:SHW)’s decreased earnings and that is its loss of a major client, Wal-Mart Stores, Inc. (NYSE:WMT). Their squabble and subsequent separation first became public knowledge back toward the end of 2010, but even now it is still wreaking havoc on Sherwin’s top line.
It is this sole factor that explains why Sherwin’s consumer sales were reduced to a mere 4% in the last quarter. It is obvious that its fallout with Wal-Mart Stores, Inc. (NYSE:WMT) has cost the company dearly, especially as the company is still trying to recover from the loss now in 2013. And you’ll probably want to know who took Sherwin-Williams’ place? It was PPG Industries, Inc. (NYSE:PPG) and its Glidden brand.
Other paint brands
Glidden paints is a prized brand, taken over by PPG in the recent past and now included in its range alongside Akzo Nobel’s coatings business for the architectural sector, which PPG Industries, Inc. (NYSE:PPG) also nabbed for a mere $1 billion. It was PPG’s Glidden paints that successfully pushed Sherwin-Williams’ Dutch Boy brand out of Wal-Mart Stores, Inc. (NYSE:WMT) in late 2010. Since then, PPG’s revenue has grown 5% and its earnings have increased 8%.
Post-acquisition, PPG Industries, Inc. (NYSE:PPG) is now officially the world’s biggest paint and coatings business. This is a bitter pill for Sherwin-Williams Company (NYSE:SHW) to swallow, because it was the company previously enjoying the position. With the help of this deal the company delivered strong performance in the first quarter for its coatings segment with 13% year-over-year earnings growth. Since this has traditionally been Sherwin’s territory, and since it now looks like PPG is moving in on it, Sherwin really need to get up and hone its game.
Mexico!
Sherwin does have some cards up its sleeve, one of them being the soon-to-happen acquisition of Comex, Mexico’s largest paint and coatings company. Sherwin is undoubtedly placing a lot of faith in this deal, which it is anticipating to close sometime during the next quarter. Admittedly, Comex and Mexico are sounding great, as far as opportunities go.
The do-it-yourself (DIY) stores chain, The Home Depot, Inc. (NYSE:HD), recently boasted 35 consecutive quarters of comparable-store sales in Mexico. As a result, the company has put more efforts into nurturing growth over on the Mexican side. In the latest quarter, The Home Depot, Inc. (NYSE:HD) launched six new retail shops and celebrated a round total number of a 100 stores in the U.S. Now it is planning seven new retail stores in Mexico this year and only two back home.
What Sherwin has got going for itself is its specialism, though. Stores like The Home Depot, Inc. (NYSE:HD) sell paints at general DIY stores, but paint and coating cans often get lost amongst all the various home-improvement tools, materials, gardening equipment and discount products. Sherwin’s niche paint-only stores give shoppers a focused and far more complete experience.
Lower sales costs
Sherwin-Williams Company (NYSE:SHW) earnings had another positive, which was its ~2% decrease in sales costs. This shows that its prices remain stable, in particular for its main products, for instance titanium dioxide. Input costs had been predicted to rise by a small amount, according to Sherwin’s earlier prediction, but they retracted this.
Sherwin now estimates that its costs will stay flat, and this in turn might bump its margins up a bit. Several titanium-oxide producers did make noises about a price increase for the TiO2 pigment, but the outcome is still uncertain right now because the industry still has high levels of inventory.
A better year forecast
Finally, the reduction of costs has assisted Sherwin-Williams in bettering its net profit within the first quarter by 17% – impressive, considering the flat year-over-year sales. This has resulted in Sherwin-Williams keeping its forecast for the full year. It still expects around 6% sales growth and per-share earnings growth of approximately 15%. The company’s per-share earnings in 2012 were $6.49 – a Sherwin-Williams’ record.
It also bumped up its dividends in the first quarter by 30%. The result per share was $0.50. Sherwin can rest easier now, knowing that it has enjoyed dividend increases during 34 continuous years. RPM, of course, has beaten Sherwin-Williams to the post with 39 continuous years and its dividend yield is better than Sherwin’s: RPM’s was 2.8%, while Sherwin only showed a yield of 1%.
So what now?
Sherwin needs to jump on the commercial-construction bandwagon, now that the industry is waking up again. Sherwin simply isn’t getting the profits it needs to from the current revival in this particular market, plus its competitors are strong to say the least.
Sherwin-Williams Company (NYSE:SHW) has obvious weaknesses, even if investors are reading its dividend increase as positive news. The main question remains, whether Sherwin-Williams shares are worth the risk in the light of recent developments and whether people should be looking at selling the stock.
The article The Paint Market: Competitors Fiercely Elbowing for Space originally appeared on Fool.com.
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