Sherwin-Williams Shocks The Market
Sherwin-Williams (NYSE: SHW) shocked the market when it lowered guidance for the third quarter. The problem was not so much that guidance was lowered, that was kind of expected in today's environment, the shock is how much the guidance was lowered because it was significant. The company says that mounting headwinds including the recent impact of hurricane Ida will cut deeply into both the top and bottom lines but this isn’t the uber-bad news it may sound like. The news isn’t good but it is opening up a buying opportunity in the stock. While guidance has been reduced and the outlook is dim, robust demand across all end markets suggests it's only a matter of time before recovery is made. The question for us today is just how deep a decline can Sherwin-Williams make before it hits bottom?
Sherwin-Williams Lowers Guidance, Shares Crater
Sherwin-Williams guidance reduction is noteworthy for another reason, the company just raised its guidance at the end of the last quarter so there must have been a significant shift in the fundamental picture. The company’s new guidance established guidance for third-quarter earnings in the range of $1.80 to $1.90 versus the $2.40 consensus but was compounded by a drastic reduction to the full-year outlook. That reduction implies revenue and earnings headwinds will persist and possibly strengthen going into the fourth quarter. The company's outlook for full-year earnings is now in the range of $7.21 to $7.41 versus the prior range of $9.15 to $9.45. That's a decline of 20%.
"As demand remains robust across our pro architectural and industrial end markets, we continue to make investments in our strategic growth initiatives, including bringing 50 million gallons of additional architectural production capacity online over the next two quarters," said Chairman, President and Chief Executive Officer, John G. Morikis. "At the same time, the persistent and industry-wide raw material availability constraints and pricing inflation we have previously reported have worsened, and we do not expect to see improved supply or lower raw material pricing in our fourth quarter as anticipated. As a result of these headwinds, we are narrowing our third quarter sales expectations and establishing third quarter earnings guidance.”
The analysts weren't enthused by the report but the response was far less bearish than it could have been. Three and only three analysts have come out so far to lower their price targets to a range between $300 and $330 but all three maintained an overweight or an outperform rating on the stock. The Pricetarget.com consensus rating is a buy and, notably, was gotten stronger since the last earnings report. The consensus price target of $340 is up over both the 30-day and 90-day periods as well.
The Technical Outlook: Capitulation In Sherwin-Williams
The price action in Sherwin-Williams stock was bearish in the wake of the guidance decline but ultimately provided a bullish signal. While price action fell hard in the wake of the report, the ensuing action smacks of capitulation and rebound. We are expecting to see Sherwin-Williams shares move higher in the near term but there is a risk of resistance at the short-term moving average. Near to midterm, we are also expecting to see the stock retest the recent lows just above $270. While the bearish momentum has not been strong, the peaks in MACD are convergent with the recent low which suggests to us it will be retested at least. A retest at the lows near $272 is a possible entry point assuming that support is confirmed by the price action. Longer-term, regardless of where Sherwin-Williams bottoms, the fundamental demand picture remains bullish and should drive the stock to new highs.
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