Northlake has sold client positions in Sherwin Williams (SHW) following the company’s disappointing update on 4Q18 earnings.  SHW preannounced a large miss versus consensus expectations driven by weakness in its North American stores, Chinese markets, and wholesale business at Lowe’s.  Demand in the U.S. was unexpectedly weak in October and November and management was at a loss to fully explain the shortfall.  Weather does seem like it was a major factor but management admitted they were unclear on the cause of the sales shortfall.  Weaker sales trends led to an inventory adjustment that further impacted sales.

Management noted that demand picked up to expected levels in December and strengthened further in January.  This news helped the stock to come off its lows versus Northlake’s sale price.  Overall, SHW was sold at a small profit versus initial purchases for clients in the fall of 2017.

We have always liked management at SHW.  They are honest and the long-term track record on operating and M&A execution speaks for itself.  Our concern now is that the stock lacks significant upside over the next year or two.  With 2019 estimates coming down a bit, the shares trade at 18X earnings at Northlake’s sale price.  SHW historically sustains a premium a multiple but with slow housing and the prospect for higher interest rates it seems like a stretch to expect multiple expansion in the near-term.  Also concerning to us is that management preannounced a material shortfall and failed to comment on 2019 guidance even though the company is scheduled to report in just two weeks.  Budgets for 2019 must be completed by now.  The company was honest about not being sure what led to the unexpected revenue weakness in October and November.  Thus, management is probably not yet confident about using the December and January as indicative of 2019 trends.  Nonetheless, we think there is risk of conservative 2019 guidance below the slightly lower estimates that have been issued in the last few days.