How Low Will Sherwin-Williams Go?

Input prices are outpacing selling prices, bad math for anyone...

Sherwin Williams (SHW) this morning lowered full year 2008 eps estimates.

The Sherwin-Williams Company Updates 2008 Sales and Earnings Expectations

* Updated FY08 consolidated net sales: down slightly versus 2007
* Updated FY08 EPS range: $3.60 to $4.10 relating to lower sales and gross margins
* Updated 2Q08 EPS range: $1.40 to $1.50 tied to lower domestic net sales and continued raw material and other input cost increases

For the full year 2008, we anticipate consolidated net sales will be slightly lower than 2007. We had previously expected a low single digit percentage increase in consolidated net sales over 2007. We anticipate diluted net income per common share for 2008 will be in the range of $3.60 to $4.10 per share. The previous expectation for the full year 2008 was in the range of $4.70 to $4.85 per share. The significantly lower expectation of diluted net income per common share for the full year 2008 relates primarily to the expected continuation of the unprecedented downturn in the U.S. housing market and rapidly rising raw material cost increases. The Company reported diluted net income per common share of $4.70 per share for the full year 2007.

This follows last week's announcement from Dow Chemical (DOW) that it was implementing a 20% price increase due to rising input costs. Unlike Dow, Sherwin does not have the ability, due to housing, to pass along an increase that large. Were housing still strong, it would.

Now, back to something I have pondered for quit some time. Why doesn't Dow just buy Sherwin? It is getting cheaper by the day and it valuation is such that it would be "earnings accredive" by year two, could be had for cash on the books and would expand the coating business Liveris has stated he wants to be more into.

Also, it is a partially vertical integration for Dow, in that some of the items Sherwin uses in its production are Dow products that, once Dow begins to lower its costs through its various JV's, would by default lower Sherwin's costs also.

For those excited by the thought, the good news is that housing will not turn anytime soon (neither will Sherwin's results) and the Kuwait deal with Dow closes in Q4, giving it $9.5 billion to go shopping. That does mean there isn't a pressing "time factor" and there are not many other possible suitors with the financial strength of Dow.

We'll see...



Disclosure ("none" means no position):Long SHW, DOW

Comments

[User 91125]

Perhaps waiting to see the outcome of RI case heard a couple weeks ago.

[CrossProfit]

Perhaps not far afield diversification is more appealing than vertical integration.

CrossProfit

[Sir Evil]

I will only do a deal that is accretive. I prefer not to do accredive. This has been the case for "quite" some time.

[MD]

Dow is probably not interested in getting into the retail business. Most of Sherwin's revenues come from their 3,000+ outlets, not from third parties. I'm not as familar with Dow, but likely it's the exact opposite for them. Dow can probably expand their coatings businesses with somebody a lot cheaper and better fitting their business strategy than SHW.

Steve
magicdiligence.com

[DRS]

You have been pumping this stock for months, and have finally realized that raw material costs are killing them. Your sense of "valuation" and what's cheap and what's not cheap is comical. Have you ever heard of multiple contraction? Even if it is cheap, the market is unwilling to pay a premium or a "normalized multiple" for this company. Shrewd investors are thankful for people like you who offer opportunities to profit due to a fundamental lack of understanding of basic behavioral finance concepts. Keep doubling up while I short this down to 45!