Sherwin-Williams Earnings: Pricing Power Drives Margin Expansion Despite Moderating Volumes

Wide-moat-rated Sherwin-Williams SHW reported strong second-quarter results due to higher selling prices and robust architectural paint demand. Selling prices increased across all three segments and raw material costs continued to moderate, with both providing a strong boost to operating margins. While near-term headwinds in architectural paint remain, we expect potential volume pressures will largely be offset by favorable pricing and moderating raw materials costs. As such, we’ve increased our fair value estimate to $211 from $201 per share due to increased near-term revenue and profitability in our forecast.

The paint stores group reported impressive results in the quarter despite macroeconomic challenges, with revenue increasing 10% year over year and operating margin expanding 280 basis points to 24%. Mid-single-digit volume and price growth contributed to the strong quarter as demand remained robust in property management, commercial, and protective and marine. Sherwin’s long-term investment in its store network continues to pay dividends, and we expect continued strength in the segment through the end of the year on strong performance from property management and commercial. The consumer brands group reported a 5% increase in revenue, largely due to higher selling prices as volumes remained pressured amid moderating do-it-yourself demand and lower sales in China. In the second half of the year, we expect strength in the professional paint market to more than offset persistent weakness in DIY demand.

Management raised its full-year revenue and adjusted earnings per share guidance, now expecting sales to be up a low-single-digit percentage and adjusted EPS of $9.50 (midpoint) from $8.30 previously. Given the strength in the first half of the year, management’s guidance increase wasn’t surprising, and we think it’s achievable given the resiliency of architectural volumes, higher selling prices, and continued moderation of raw material costs.