We are increasing our 2018 eps estimate to 1937 from

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We are increasing our 2018 EPS estimate to $19.37 from $18.33 to partially reflect positive profit trends from the recently completed 4Q17, as well as our forecast calling for strong industry fundamentals and improving results in the Consumer Brands segment. The consensus for 2018 is $19.09. At the same time, we are introducing a 2019 EPS estimate of $22.20 per share. Our estimate implies growth of about 15% from our 2018 estimate. Our estimate assumes positive industry fundamentals, higher product pricing and ongoing cost benefit synergies from the recent Valspar acquisition. The current 2019 consensus is $21.88. FINANCIAL STRENGTH & DIVIDEND We rate Sherwin-Williams’ financial strength as Medium, the midpoint on our five-point scale. The company’s debt is rated BBB/stable by Standard & Poor’s and Baa3/stable by Moody’s. Fitch rates company debt at BBB/stable. Following the Valspar acquisition, SHW’s debt ratings were lowered by the credit agencies, due primarily to higher overall debt. At the end of 4Q17, SHW’s total debt/capitalization ratio was 74.0%, up from 51.0% a year earlier. The total debt/cap ratio is above the peer average. Over the past five years, the debt/cap ratio has averaged 61.7%. Outstanding debt totaled $10.52 billion at the end of 4Q17, up from $1.95 billion at the end of 4Q16. The increase reflected debt issuance to help fund the Valspar acquisition. Sherwin-Williams had cash and cash equivalents of $204 million at the end of 4Q17, compared to $890 million a year earlier. The company suspended share buybacks from March 2016 to June 2017 as it pursued the Valspar acquisition. With the merger now complete, we expect buybacks to resume. The company has 11.65 million shares (12% of total shares outstanding) on its current authorization. The company did not buy any shares in 4Q17. The annualized dividend of $3.40 yields about 0.8%. The company raised its dividend by just 1.2% in 2017 due to the Valspar acquisition, down from its substantial 25% increase in 2016. We expect dividend growth to pick up now that the merger has been completed. Our dividend forecasts are $3.56 for 2018 and $3.60 for 2019. MANAGEMENT & RISKS John Morikis succeeded Christopher Connor as the company’s CEO on January 1, 2016, following more than nine years as president and COO (he retains the title of president). Mr. Morikis joined Sherwin-Williams in 1984 as a management trainee, and has held many key positions in his 31+ years with the company. SHW investors face risks related to the highly cyclical nature of the company’s end markets, particularly construction, housing and manufacturing. The company also faces risks related to the integration of its many acquisitions. COMPANY DESCRIPTION Sherwin-Williams is the largest U.S. producer of paint, coatings and related products, which it sells to professional, industrial, commercial and retail customers. The company operates over 4,100 retail stores and supplies coatings directly to retailers, distributors, industrial & commercial customers and other industry professionals. The company completed its acquisition of Valspar on 6/1/17.
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