Sherwin Williams (SHW) reported strong 2Q18 results and increased guidance for the year, reversing the reduced guidance from last quarter. Initial EPS guidance for 2018 of $19.05 was previously reduced to $18.65 reflecting new investments in an expanded partnership with Lowe’s, but SHW now expects to earn $19.20 reflecting a strong start to paint season. Paint sales volumes are growing, and price increases are helping to offset higher raw material input prices. SHW also continues to benefit from the integration of Valspar, which has now been part of the combined company for over a year. Northlake expects SHW to climb toward $500 reflecting 20x 2020 EPS of $25.

SHW is experiencing broad-based volume growth across segments and geographies exceeding results of competitors in the industry, which implies market share gains and strong execution. Management noted that recent strength is continuing into 3Q18. Importantly, SHW has also been able to pass through higher raw material prices to customers with minimal pushback. While rising input costs remain a headwind, the increased guidance conservatively assumes these costs – epoxy, zinc, propylene, and titanium dioxide – will be at the high end of the expected range and will not stabilize until 4Q18 as opposed to the previous expectation for moderation starting in 3Q18. Further, SHW has demonstrated the ability to manage through this inflationary environment by taking pricing actions as necessary.

Now that Valspar has been part of SHW for over a year, 3Q18 will be the first quarter where results are directly comparable year-over-year. Management has consistently said that they run the combined business as a single entity instead of viewing each legacy unit separately. Investors may now come to share that view when SHW reports consolidated results, more clearly demonstrating the power of the combined business instead of providing opportunities to pick apart which legacy group is doing relatively better or worse. The combined supply chain for North America is nearly fully integrated; efforts to improve efficiency internationally are now underway. More than half of the expected synergy benefits were booked in the first half of 2018 leaving SHW ahead of schedule.

In summary, Northlake continues to expect SHW to move toward $500 as the long-term growth potential becomes more clearly understood. With the directly comparable 3Q18 report upcoming, the benefits of the Valspar acquisition should become more apparent in the consolidated financial results. Domestic housing and remodeling activity should continue to drive paint volumes higher. Price increases should be able to offset inflationary headwinds. The recently increased guidance and positive commentary give us greater confidence that SHW will continue to grow earnings to $25 by 2020.

SHW is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  SHW is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.