ATML Earnings Action

Having declined just 2.2% ytd, Sherwin-Williams Company (SHW), the well-known basic materials brand which engages in the development, manufacture, distribution, and sale of paints, coatings, and related products, has outperformed the benchmark S&P 500, of which it is a component, by 37.5%. A relatively inexpensive valuation with a PE ratio in the low teens and the ability of management to deliver by beating its earnings forecast and revising its outlook positively has kept Sherwin insulated from much of the market turmoil. In the third quarter, the company posted EPS of $1.50, above the guidance range of $1.20 to $1.45, with sales increasing 3.3% to a record $2.27 billion and consolidated net sales growing by 1.7% thanks to acquisitions and price increases. Despite acknowledging the “unprecedented downturn in the U.S. housing market that has severely depressed paint demand in the domestic new residential, residential repaint, and commercial markets” as well as foreign market weakness, the company managed to raise expectations for net income per common share for full year 2008 to a range of $3.97 to $4.17, “painting” a much better outlook than analysts feared. It all came down to the following factors which are part of the bull argument; 1) significant progress made in “trimming the fat” - controlling SG&A, store openings, management of working capital 2) likely lower raw materials and input costs which now are expected on the lower end of the 9% to 14% range 3) and the continuation of stock buybacks – with 20 million shares remaining authorized on the plan as of Sept. 30. Thus, while recent trading action has been noticeably bearish, the stock looks to have found support again at its 200 day moving average of $54.22, portending higher prices in the near term especially with the fundies still intact.