For the third quarter in a row, Sherwin Williams (SHW) adjusted 2018 EPS guidance. In 1Q18, SHW dropped the estimate from $19.05 to $18.65 due to new investments in an expanded partnership with Lowe’s. Then in 2Q18, SHW turned around and increased EPS to $19.20 after a strong start to the year. Now in 3Q18, SHW reduced 2018 EPS guidance to a midpoint of $19.13, with an expected range of $19.05 to $19.20 instead of the previous high end at $19.35.

The stock reacted poorly to the most recent change amid a difficult stock market environment with concerns ranging from slowing housing growth to runaway raw material inflation and new tariff increases. The moving guidance target can be explained by the confluence of integrating the transformative acquisition of Valspar, aggressively investing in attractive new partnerships such as Lowe’s, and the quickly changing inflationary environment tied to the price of oil and trade war rhetoric.

While slower housing construction and home sales have become points of macroeconomic interest, remodeling and repainting of homes makes up 80% of the industry demand which bodes well for continued low single digit growth over the long term. The contractor business was once again a strong point for SHW this quarter.

Inflation is running ahead of SHW’s price increases for now, but the company has demonstrated the consistent ability to pass inflation-based price increase through to partners with minimal push back. SHW has more price increases scheduled in 4Q18 and 1Q19, and will continue to take price to keep up with inflation.

The integration of Valspar has gone fairly smoothly and is now largely complete. Moving forward, SHW expects to find several opportunities to grow both brands and find incremental synergies. The investments in the Lowe’s partnership appeared to deliver good results quickly in 2Q18 and similar results should become apparent in 2019 as SHW recoups the upfront investment in the expansion.

Looking past all the noise, Northlake continues to believe SHW is on track to deliver 2020 EPS of $25, which could push the stock above $500 at current price-to-earnings multiples of 22x this year and 19x next year’s EPS estimates.

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.