KEY RATING DRIVERS
The ratings for SHW incorporate the company's leading market position in the architectural coatings industry, its unique distribution platform, the breadth and depth of its product offerings, solid free cash flow generation, and strong management team. Risk factors include lead-based paint litigation cases against SHW, volatile raw materials costs, and the company's relatively aggressive growth strategy.
The Stable Outlook reflects the expected continued improvement in the overall U.S. construction market during 2014. The Stable Outlook also reflects the company's solid liquidity position and strong operating performance during 2013 and so far in 2014.
LEADERSHIP POSITION WITH UNIQUE DISTRIBUTION PLATFORM
SHW is the largest coatings manufacturer in the U.S. and the third largest worldwide. SHW has a network of 3,908 company-operated paint stores and 582 company-operated branches as of
The company seeks to expand its distribution platform by opening new stores and pursuing acquisition opportunities. In a solidly expanding economy, management plans to expand the store base at an average of 3% per year (100+ stores annually). However, the pace of store expansion has been slower over the past six years as demand slowed and the company closed redundant stores from previous acquisitions. Management plans to open between 80-90 net new stores this year.
Fitch believes that the company will continue to pursue acquisition opportunities to grow its business. The acquisition of the U.S. and Canadian operations of Comex last year added 306 company operated paint stores to the company's network, increasing SHW's store presence in key markets. This acquisition will contribute about
SHW has a long track record of adhering to a disciplined financial strategy and Fitch expects this to continue. The company's leverage has been slightly above it long-term target of 1x debt to EBITDA due to the pre-funding of
The company has historically used excess FCF to repurchase its stock and/or fund acquisitions. SHW repurchased
SHW's credit metrics remain appropriate for the rating level. Debt to EBITDA at the end of the
Interest coverage remains solid at 21.2x for the LTM period ending
LIQUIDITY AND CASH FLOW GENERATION
SHW maintains solid liquidity with cash of
Cash flow generation remains strong with free cash flow (FCF) totaling
IMPROVEMENT IN SHW'S U.S. END-MARKETS
Fitch's ratings on SHW take into account the cyclicality of the company's end markets. Residential, commercial and industrial construction are each cyclical and can be influenced by economic trends. Fitch expects total U.S. construction spending will increase 7.9% during 2014 following a 5.0% improvement during 2013. The growth will be driven primarily by continued strength in the new residential construction sector.
Housing comparisons are challenging through first-half 2014, and so far this year most housing metrics seem to have defied expectations and fallen somewhat from a year ago. Though the severe winter throughout much of
Fitch forecasts home improvement spending will increase 6% in 2014 following a projected 5% growth in 2013. The continued improvement in the housing market, as well as strong home price appreciation seen last year and so far this year, are likely to drive higher spending on home renovation projects in 2014.
Non-residential construction is also expected to grow modestly during 2014. Fitch expects private non-residential construction spending will improve 5% during 2014 while public construction spending is forecast to increase 3% this year.
LEAD-BASED PAINT LITIGATION RISKS
SHW and other companies are or were defendants in legal proceedings seeking recovery related to lead-based paint litigation cases. On
Aside from the potential liability associated with the abatement costs, there is also increased possibility that the
Positive rating actions may be considered if the company's credit metrics improve meaningfully from current levels, including lease-adjusted leverage consistently below 2x and FFO fixed charge coverage at or above 4x.
Negative rating actions could occur if the company performs in line with Fitch's 2014/2015 stress case forecasts, including EBITDA margins falling to between 11%-12% and lease adjusted leverage consistently exceeding 3x. Additionally, Fitch may consider a negative rating action if there is an adverse decision against the company related to lead-based paint litigation cases wherein the judgment will lead to higher debt levels and lease-adjusted leverage consistently above 3x.
Fitch has affirmed the following ratings for SHW with a Stable Outlook:
--Long-term IDR at 'A-';
--Senior unsecured notes at 'A-';
--Unsecured bank credit facilities at 'A-';
--Short-term IDR at 'F2';
--Commercial Paper (CP) at 'F2'.
Additional information is available at www.fitchratings.com.
--'Corporate Rating Methodology' (
Corporate Rating Methodology -- Effective
Source: Fitch Ratings
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