There were some interesting things said on the Sherwin Williams (SHW) call.
CEO Chris Connor:
“New residential consumption was down in a high 20% range for the year. Existing home turnover declined nearly 20%; consumer spending slowed dramatically, credit markets contracted, manufacturing activity turned negative. Consumer confidence sag and GDP growth stalled. In short, it was exactly the kind of year that we anticipated 12 months ago.
We entered 2007 prepared for the inevitable slowdown in end market demand and as a result of this preparation, Sherwin turn in, what I would describe, as a solid performance last year. Consolidated net sales grew a modest 2.5% to just over $8 billion in sale. Consolidated net income increased almost 7% and earnings per share increased more than 12% to a record $4.70 per share.”
Regarding the dividend:
“I will be recommending a continuation of our policy of paying out approximately 30% of prior year’s earnings per share in the form of a cash dividend in 2008. This would result in a quarterly dividend of $0.35 per share or $1.40 per share for the year, an increase of 11.1% over the $1.26 per share we paid out in 2007.”
Sherwin will yield around 2.5% at those levels.
Earnings:
Sherwin sold off yesterday 1.7% based on this one sentence, “first quarter will be in the range of $0.72 to $0.80 per share, compared to $0.83 per share earned in the first quarter of 2007.”
It ignored what followed “Full year 2008, we expect net sales will also increase in the low to mid single digits over 2007. With annual sales at that level, we estimate diluted net income per common share for 2008 will be in the range of $5 to $5.15 per share, compared to current analyst consensus of $5.03 for 2008, and $4.70 per share earned in 2007.”
So, Q1 will fall 3 cents short but the full year looks to be above estimates and shares get whacked. This is the very reason you cannot let the market guide your investment decisions.
Had anyone bother to even listen to Connor, he explained the earnings later. “If we just look at our Stores segment which is we all know the lion share of our company. The southern divisions and Bob takes you through that on the call in terms of which parts of the Stores Group are performing the best and I think he made the comments that our southeastern division was the first performing of the geographic segments in the Stores division.
And typically it’s been the southeastern division to a lesser extent to the southwestern division carried the company to the first quarter. This is where we have a better weather, flatter sales curve throughout the year and these are the parts of the country that are being impacted the most aggressively in particularly Florida which we’ve talked about in this call in the past.
So we are not getting the lift from the southern portions of our Stores segment, early in the year to carry the first quarter. Adding to that, the two acquisitions that we’ve made this past year are northern type acquisitions. And again they have a more traditional and a profit curve with a second and third quarter or the quarters when they make most of their contribution.
So we’ve added a significant number of stores that lost money in the first quarter. So stores that have historically carried up to or something through the market environment and for that reason we guided the first quarter down to expect all those things as they typically would do to catch up in the second and third quarter and that’s why we have somewhere between 8% and just below 10% guidance for the year earnings.”
Share Repurchases:
Expect about 8 million shares in 2008 (about 6% of outstanding shares).
In Q4 repurchased 3 million shares at “around” $60 a share.
Paint Stores:
Plan to open 100 more in 2008
I would expect 2008 to be an anemic year in term of repurchases as Sherwin digested to activity of 2007. Now, should housing turn ahead of expectations and the economy rebound, Sherwin, as it is positioned should see the incremental improvement to it own bottom line as it is currently geared for a poor 2008 operating environment in the US.
That being said, expedited share repurchases would most likely be first on the list with the stock at these levels.
Disclosure (“none” means no position): Long Sherwin
5 replies on “Sherwin Williams Earnings Call: Was Anyone Listening?”
Company is growing the bottom line at almost 10% even in a tough environment and trading 10x FCF. Doesn’t take a genius to recognize that bargain, eh?
hard to believe isn’t it?
Sometimes I feel like I missed something. But looking at their annual reports, management seems smart and shareholder focused (buybacks, dividend up), but in the last few years has not gotten any recognition in the market. They should sell for 20x FCF with this type of stable growth and shareholder friendliness. I think its a testament to the company that in such a rough year for anything consumer or housing, SHW grew significantly, and the stock didn’t budge.
jeff,
if it were not for situations like this, value investing would not exist
you’re absolutely right