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Earnings Results: Sherwin-Williams issues big profit and sales warnings, will ‘prepare for the worst’ in 2023

Shares of Sherwin-Williams Co. tumbled Thursday, after the paint and coatings maker warned of a big 2023 profit and sales miss, as demand is expected to weaken as the housing market remains pressured and the U.S. industrial sector slows.

Sherwin-Williams stock

dropped 8.8% in afternoon trading, enough to make it the S&P 500 index’s

biggest decliner. It was headed for the biggest one-day drop since it plunged 18.7% on March 16, 2020.

The company said earlier Thursday in its fourth-quarter report that it expected 2023 adjusted earnings per share, which excludes nonrecurring items, of $7.95 to $8.65, well below the current FactSet consensus of $10.07.

Sales for 2023 are expected to be flat, or fall in the mid-single-digit percentage range from the $22.15 billion recorded in 2022, while the current FactSet consensus calls for a 3.5% rise to $22.93 billion.

“We currently see a very challenging demand environment in 2023, and visibility beyond our first half is limited,” said Chief Executive John Morikis in a post-earnings conference call with analysts, according to a transcript provided by AlphaSource/Sentio.

The weak outlook comes as the U.S. housing market is expected to face “significant pressure” this year, Morikis said. And while Europe has already seen an industrial slowdown, “the same is beginning to appear in the U.S. across several sectors.”

Given that the Federal Reserve is intent on slowing demand to tame inflation, Morikis said the company’s “base case” for 2023 is to “prepare for the worst.” “Based on current indicators, we believe this is the most realistic outlook at this time,” he said.

The company also reported earlier Thursday fourth-quarter net income that rose to $386.3 million, or $1.48 a share, from $304.0 million, or $1.15 a share, in the same period a year ago. Adjusted earnings per share rose to $1.89 from $1.34, topping the FactSet consensus of $1.86.

Income got a boost from higher selling prices and increased volumes in the Americas region, partially offset by lower volumes in the consumer brands and performance coatings groups outside of North America.

Sales grew 9.8% to $5.23 billion, just shy of the FactSet consensus of $5.27 billion, as Americas group sales rose 15.7%, consumer brands sales fell 2.4% and performance coatings sales increased 4.2%.

Cost of goods sold rose less than sales, increasing 4.0% to $3 billion, as gross profit margin improved to 42.7% from 39.5%.

For 2023, the company expects raw material costs to decline in the low- to mid-single-digit percentage range, while other costs, including wages, are expected to increase in the mid- to high-single-digit range.

The stock has gained 2% over the past three months, but has dropped 23% over the past 12 months. In comparison, the S&P 500 has gained 5.7% the past three months and lost 6.9% the past year.

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