There Are Cracks In The Paint At Sherwin-Williams

Sherwin-Williams Cut To Sell At Credit Suisse 

The analyst's sentiment for Sherwin-Williams (NYSE: SHW) has been slipping over the past few months and now the downtrend is gaining momentum. Analysts at Credit Suisse downgraded the stock to sell citing a number of factors that amount to one thing: this highly valued stock is well past its pandemically inspired business peak and there are headwinds forming in the economy. Notably, housing sales have been sluggish which, when combined with no-longer-existent COVID tailwinds, spells a sharp decline in DIY demand. In the eyes of Credit Suisse analyst John Roberts, the stock is due for a “valuation correction” that could shave 10% or more off of the recent price action. 

“Our Underperform rating on Sherwin-Williams is based on the company having more economic sensitivity than may be generally recognized, because of the defensive earnings performance during the pandemic,” he explained. “While SHW’s balance between pro-applied and DIY residential paint has provided defensiveness during the pandemic, that may not repeat during a non-pandemic period of rising interest rates.”

The 20 analysts rating the stock have it pegged at a firm Hold but that is down from a firm Buy over the last 12 months. The Marketbeat.com consensus price target of $320 is still more than 20% above the price action but that too has been trending lower. Credit Suisse’s target of $245 is the new low.

The Analysts Have Set A Very High Bar For Sherwin-Williams

We see nothing but downside risk in the outlook for Sherwin-Williams's Q2 earnings expectations. The analysts are predicting $6.02 billion in revenue which is good for a company record and a gain of 20.4% sequentially and 11.8% YOY. While we see the potential for growth both sequentially and YOY, we do not think the current trends support the analyst's outlook. It is our opinion the company will post flat revenue versus last year with a possibility of earnings contraction. In that event, investors should be prepared for the bottom to fall out of the price action. 

Sherwin-Williams pays a safe dividend but investors should not count on it holding up the market. The dividend is safe because it is very small at only 0.85% of the stock price. The upshot is that holders can rely on the payment during the expected downturn due to the low 30% payout ratio and rock-solid balance sheet. Holders can also anticipate another dividend increase at the end of the fiscal year. 

The Institutions Are Still Haning On To Sherwin-Williams 

The institutions aren’t just hanging on to Sherwin-Williams stock they are buying it too. The institutional activity has been net-bullish for the last 10 consecutive quarters and buying actually increased in the first two quarters of 2022. Total institutional holdings are up to 77.35% and growing and should help support price action over the long term. If, however, sentiment begins to shift in this quadrant it will put downward pressure on the price action. 

Turning to the chart, Sherwin-Williams stock bottomed earlier this year and began moving higher following the last earnings report. The caveat is that price action is still below a key resistance point at $280 and may not be able to get above that level before the next earnings report. If the report is as lackluster as we think it will be, price action will not move above $280 after the report either.