How Concerned Should We Be About The US Paint Market

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

October 31st, 2016

How Concerned Should We Be About The US Paint Market

  • A couple of weeks ago we wrote a “concerned” piece about of the state of the US coatings market and raised the question around whether some price competition was creeping in at a time when producers were seeing the direction of prices of their raw material inputs change from a positive driver of earnings to a negative. See research.
  • Since that report:
    • SHW has reported, missed estimates and guided down for Q4
    • PPG has guided down for Q4
    • Masco missed and guided down – same for Whirlpool – Whirlpool’s Q4 revision was much more significant than MAS
    • TiO2 producers are showing better numbers so far and there is consensus that TiO2 pricing has finally bottomed – a mild negative for paint makers so far but a directional change
    • The big box retailers continue to advertise lower priced paints heavily – although the SHW sale appears to be over
    • Heavy sales efforts from the big-box retailers and other home improvement retailers on other remodel relating products such as roofing, insulation and flooring
  • Even with a better existing home sales number for September it would appear that there is an overhang of materials – given the heavy discounting and advertising this month
    • It may well be that this becomes more of an impact in Q4 2016 than Q3, hence the more cautious positioning from PPG and SHW
    • MAS continues to offer lower paint pricing through Home Depot
    • Interestingly; no caution in guidance from Owens Corning or other building products suppliers – DOW had a good quarter in building products
  • Given the recent speculation regarding the SHW/VAL deal it occurs to us that Lowe’s could be an interested party in objecting to the SHM/VAL merger – their paint shelves and current rebate program feature VAL, SHW and PPG paints and they might lose some pricing power or be forced to look for another supplier after SHW and VAL merge – this would be bad for SHW
  • The sector has underperformed over the last few weeks, following the earnings misses and the guidance – SHW remains very expensive, PPG much less so – if the SHW/VAL deal breaks clearly VAL has downside
    • We do not think it will break, but forced divestments might make it far less accretive for SHW

Exhibit 1

Source: Capital IQ, SSR Analysis

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