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Stock Strategist

Look Beyond Sherwin-Williams' Short Term

The company is leveraged to housing market improvements through professional paint contractors.


 Sherwin-Williams (SHW) recently reported disappointing second-quarter results and lowered its 2015 revenue and earnings outlook. But we think the headwinds are short term in nature, and we expect the company to make up for these weaker results through 2016. The company attributes sluggish growth to heavy rainfall over the first half of 2015, which has put many paint projects on hold, especially going into the summer painting season. We remain positive on the company's long-term prospects due to its leverage to rising housing starts, and we maintain our narrow economic moat rating. Since we think weather-related issues only delay projects rather than lead to cancellation, we maintain our $314 fair value estimate. In light of the sharp decline in the share price after the disappointing earnings release, we think Sherwin-Williams is undervalued.

As a result of soft sales growth in the first half, Sherwin-Williams decreased its full-year revenue growth guidance to 3%-5% from high single digits and lowered its full-year earnings per share outlook to $10.60-$11.00 from $10.90-$11.10. Second-quarter revenue growth came in at 2.9% year over year, far lower than the 6%-8% the company had forecast. Earnings per share came in at $3.70 for the quarter, on the low end of the $3.70-$3.90 guidance. The paint store group reported fairly weak comparable sales growth for the quarter of 3.9%, a deceleration from the 6% or higher growth that it typically reports. For the quarter, the consumer group saw sales rise 13.1% year over year due to growth in HGTV paint sales through Lowe's; sales would have been weak otherwise.

David Wang, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.