S&P Raises Outlook on Sherwin-Williams (SHW) to Stable; Cites Strong Business Risk Profile

Standard & Poor's Ratings Services revised its outlook on Sherwin-Williams Co. (NYSE: SHW) to stable from negative. We also affirmed our 'A' corporate credit rating on the company. In addition, we lowered the issue rating on its senior unsecured debt to 'A-' from 'A'.

"The outlook revision reflects our view that Sherwin-Williams' credit measures would remain appropriate for the current rating in the absence of increased debt leverage that would have resulted from the Comex acquisition," said Standard & Poor's credit analyst Liley Mehta.

The rating on the senior unsecured debt is one notch below the corporate credit rating because the ratio of priority liabilities to total adjusted assets as defined in our criteria exceeds 20%, the threshold for notching down.

Our ratings on Sherwin-Williams are based on our assessment of the company's strong business risk profile and modest financial risk profile, resulting in initial analytical outcome (anchor) of 'a'. Our anchor score of 'a' reflects our view that the relative strength of the company's strong business risk profile is somewhat weaker than that of other similarly rated companies given its narrow product focus with significant exposure to the housing industry and limited geographic diversity.

The stable outlook indicates our expectation that the credit measures would remain appropriate for the current rating supported by Sherwin-Williams's commanding market position, strong discretionary cash flows, and prudent financial policies. For the current rating we expect Sherwin-Williams to maintain FFO to debt ratio between 45% to 50%.

We could consider an upgrade if the FFO to debt ratio improves to above 50% on a sustained basis, management commits to maintain stronger credit metrics, and there is more clarity regarding the litigation liabilities.

Based on our scenario forecast, we could consider a higher rating if EBITDA margins increase by 200 basis points or more from expected 2014 levels, along with revenue growth in excess of 10%, and there is a modest outlay related to the lead paint litigation.

We could consider a downgrade if the company makes a large debt-financed acquisition or incurs significantly higher-than-expected share repurchases, and if an economic setback reduces demand for architectural and industrial coatings, or if litigation requires major cash outlays that would cause FFO to debt ratio to decline to 40% without clear prospects of recovery.

Based on our scenario forecast, we could consider a lower rating if EBITDA margins declined by 200 basis points or more from expected 2014 levels, along with revenue growth in the low-single-digit percent area. We believe a litigation-related payment of more than $500 million or share repurchases of around $1 billion for two consecutive years would result in the FFO to debt ratio deteriorating to around 40%.

You May Also Be Interested In

• Sherwin-Williams (SHW) PT Lowered to $380 at Loop Capital
• SEI Investments (SEIC) PT Lowered to $69 at Piper Sandler
• WWP, Plc (WPP) Issues Q1 Trading Update