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WIKI ANALYSIS
Sherwin-Williams Company (NYSE:SHW) is the largest U.S. producer of architectural coatings(house paint) by revenue. The company also produces paint and finishes for automobiles and planes. SHW sells its products domestically and internationally through its own retail stores and through third party distributors. Store expansion has played an important role in SHW's revenue growth over the past few years. For 2008, about 61% of the company's sales occurred through its network of retail stores.[1]
SHW sells premium (e.g. high priced) paints to professional painters and has benefited from the growth of its core market as homeowners have increasingly moved away from do-it-yourself paint jobs, in favor of hiring professional painters. Conversely, the company remains exposed to fluctuations in the U.S. housing market. Existing home sales are directly correlated with home improvements, including paint jobs. The housing slump which started in 2007 has led to decreased paint sales, causing revenue and net income to fall. In the first six months of 2009, net sales fell 12.6%, to $3.5 billion, and net income fell 21.8% to $195 million.[2]
Business Financials
SHW has three business segments: the Paint Stores Group, the Consumer Group and the Global Group:
- The Paint Stores Group (FY2008 sales: $4.83 billion, 2008 profits: $647.9 million) consists of 3,346 company-operated specialty paint stores in North America as of Dec 31, 2008. This division sells Sherwin-Williams branded paint products to end use customers, from professional contractors to homeowners.[3] This segment of the business accounts for most of their revenues and profits, as seen in the chart below.
- The Consumer Group (FY2008 sales: $1.27 billion, 2008 profits: $140 million) distributes Sherwin-Williams branded paint and other products to third party customers such as mass merchandisers, home centers, independent paint dealers, hardware stores and automotive retailers, among others, for resale to end use customers.[4]
- The Global Finishes Group (FY2008 sales: $1.87 billion, 2008 profits: $152.2 million) sells Sherwin-Williams branded paint, coatings, and related products internationally through 541 company-operated architectural, automotive, industrial and chemical coatings branches with distribution in more than 30 countries worldwide, primarily in Europe, South America, and Asia.[5]
Sherwin-Williams revenue and operating income grew steadily from FY2006-2008, due in large part to its aggressive store openings and acquisitions.
| 2006 | 2007 | 2008 | ||
|---|---|---|---|---|
| Total Revenue ($M) | 7,809.76 | 8,005.29 | 7,979.73 | |
| Operating Income ($M) | 834.31 | 912.94 | 714.48 | |
| Operating Margin | 10.7% | 11.4% | 9.0% | |
Q1 & Q2 FY2009 Summary
For the six months ended June 30, 2009, net sales fell 12.6%, to $3.5 billion, and net income fell 21.8% to $195 million.[9] The cause was falling demand for paint, itself caused by falling home construction and refurbishing.
Q3 FY2009 Summary
SHW beat analyst expectations of $1.35 earnings per share when it reported $1.51 earnings per share for the third reporting quarter of FY2009.[10] However, SHW's third quarter net income of $175.2 million for 3rd quarter FY2009, was lower than $177.1 million for 3rd quarter FY2008.[11] SHW's revenue fell approximately 12% to $2 billion this quarter compared to fiscal year-ago quarter.[12] Note also that SHW's stock repurchase of almost 3.9 million shares during this quarter helped boost its EPS numbers.[13] SHW attributes its lowered paint store sales largely due to weak commercial and residential architectural coatings demand in a depressed housing market (See Key Trends and Forces).
Q4 FY2009 Summary
SHW reported earnings of $65 million (58 cents a share) in the fourth fiscal quarter of 2009, compared to $50 million last year ago (42 cents a share); this beat analyst expectations of 52 cents a share.[14] CEO Christopher Connor attributed these earnings to stability has returned in some market segments, but remain weak due to the continued downturn of the housing sector. Therefore, SHW believes that its first-quarter profit would likely fall short of forecasts.[15] The increase in reported earnings was mainly due to efforts to control costs and increase efficiency; therefore bottom line growth was satisfied through operating expense cuts rather than top line growth. For example, during the fourth fiscal quarter, revenues decreased by 5.9% to $1.6 billion, as same-store sales also dropped 11%.[16] Looking forward, the new tax credit for first-time buyers and low mortgage rates will help bring in greater profits to SHW, which is highly dependent upon new housing development.
Trends and Forces
Because New Homes often Require Painting, U.S. Housing Market Weakness Directly Affects SHW's Sales
A significant decrease in the quantity of homes sold results in a decrease in touch-up painting by the seller and remodeling painting by the new resident. Whenever a home is sold, there is usually some remodeling involved, and this remodeling will usually involve some form of repainting. Statistics show that a homeowner who has been in a place for 5 years makes an average of only 0.5 paint transactions per year, while a resident who has been there for 2 years or less makes an average of over 7 times that number.
Because Paints often Contain Lead, Frequent Litigations Dampens SHW's Profts
SHW remains exposed to potential litigation over the lead content of its paint in previous years. For example, in Februrary 2006, a Rhode Island jury found that The Sherwin-Williams Company (SHW) and two other companies were responsible for creating a public nuisance in a lead-based paint lawsuit brought by the State of Rhode Island, proposing that the defendants spend $2.4 billion in clean-up costs.[17] This case was later overturned by the Rhode Island Supreme Court on July 1, 2008.
SHW is Well-Poised to Tackle the Growing Professional-Painting and Receding DIY Markets
As U.S. demographics have shifted towards more dual-income families, families have found professional paint jobs to be more affordable, while finding themselves with less time for Do-It-Yourself (DIY) projects has . Over the past 30 years the market share of professionals in the residential paint market has grown from 40% to 60%.[18] SHW is well positioned to capitalize on this trend, because its paint stores target the professional user. Additionally, professional users are more likely to buy the high quality (e.g. high priced) paint produced by Sherwin-Williams, and they are more brand loyal than the more price consumer. Most of SHW sales are to professional painters, so this trend has a large positive effect on their total revenue and profitability. In contrast, competitor Masco sells primarily to DIY customers in their kiosks in Home Depot,[19].
SHW Intends to Capture China's Paint Market, the World's Second Largest
SHW has announced plans its intention to capture up to 60% of the Chinese paint market, the second largest market for paint products in the world. [20]. In 2004, the company opened several factories in the country dedicated to producing finishes for the Chinese market. Three years later company opened its first franchise store in Shanghai, and since then has grown its number of stores rapidly. The company's growing exposure to China and other international destinations, has been instrumental in helping the company to weather the downturn in the 2008 downturn in the U.S. housing market.
Competition
The U.S. coatings market can be split into two major segments, the architectural coatings market and the industrial and commercial coatings market. Architectural coatings include interior and exterior paints stains and varnishes, etc.; Industrial and commercial coating includes auto and other industrial coating. SHW produces in both markets, but mostly in the architectural one, and has different competitors in each.
The Architectural Coatings Market
The architectural coatings market accounts for about 45% of the total coatings market. Sherwin-Williams is by far the largest producer in this market. Its revenues of 7.8 billion dwarf its closest competitors ICI, Benjamin Moore and Masco.
- ICI: ICI was bought out by Akzo Nobel. They both distribute their products to large retailers and operate 450 of their own retail stores in the U.S..[21]
- Benjamin Moore: Benjamin Moore is a privately held company; both ICI and Benjamin Moore have estimated architectural coatings revenues of around $1.5 billion. Benjamin Moore operates about 1,200 signature stores in the U.S..[22]
- Masco: Masco, notable for its line of Behr paints, had net sales of $1.629 billion from its "Decorative Architectural Products" business segment.[23] Masco sells primarily to the DIY market with kiosks in all 2200+ Home Depot stores nationwide.
The Industrial and Commercial Coatings Market
Sherwin-Williams is a small player in this segment of the coatings market, which is largely dominated by the large chemical corporations such as Akzo Nobel, DuPont, and PPG. This segment accounts for only about 8% of Sherwin-Williams' yearly sales.
Footnotes
- ↑ Sherwin Williams 2008 Annual Report, page 5
- ↑ SHW, 2009 Q2, 10-Q
- ↑ Sherwin-Williams 2008 Annual Report, page 5
- ↑ Sherwin-Williams 2006 10K Item 1: Business, p. 2
- ↑ Sherwin-Williams 2008 Annual Report, page 7
- ↑ Sherwin-Williams 2007 10K Item 6: Selected Financial Data, p. 14
- ↑ Sherwin-Williams 2008 Annual Report, page 5-7
- ↑ Sherwin-Williams 2008 Annual Report, page 5-7
- ↑ SHW, 2009 Q2, 10-Q
- ↑ Sherwin-Williams Co. Beats Analyst Expectations
- ↑ Sherwin Williams posts lower profit, shares drop
- ↑ Sherwin-Williams sees drop in 2009 sales, profit
- ↑ Sherwin-Williams Q3 Profit, Revenue Fall (SHW)
- ↑ Sherwin-Williams shares rally on profit improvement
- ↑ Sherwin-Williams Profit Rises On Cost Cuts
- ↑ Sherwin-Williams Q4 beats Street, sees weak Q
- ↑ Fitch Monitoring Sherwin-Williams on Reversal of Rhode Island Verdict
- ↑ Bharat Book Bureau, "World Architectural Paints to 2009"
- ↑ Masco 2006 10-k Item 1: Business, p. 4
- ↑ [http://www.tmcnet.com/usubmit/2006/08/22/1823320.htm Sherwin Williams to Open First Franchised Store in China August 22, 2006
- ↑ ICI Paints Stores, "About ICI Paints"
- ↑ Benjamin Moore, "About Us: The Ultimate Retail Experience"
- ↑ Masco FY2008 10K Item 1, p. 2
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