I don't know where you bought your paint over the past five years, but if you bought a paint stock, I hope it was Sherwin Williams Co. (SHW, Financial):
The competitors shown in this chart are PPG Industries Inc. (PPG, Financial) and RPM International Inc. (RPM, Financial).
And as this excerpt from a GuruFocus table shows, total returns over those five years have been highly variable, but Sherwin Williams made the most of its good years:
What is Sherwin Williams?
This overview of the company comes from its 10-K for 2019: "The Sherwin-Williams Company, founded in 1866 and incorporated in Ohio in 1884, is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe, Asia and Australia."
Its operations are divided into four segments:
- The Americas Group: Some 4,800 retail paint stores, operated by the company, in the U.S., Canada, Latin America and the Caribbean. It sells to architectural and industrial paint contractors, as well as do-it-yourself homeowners.
- Consumer Brands Group: Sells a broad range of branded and private label paints, stains and other products. In 2019, 57% of its sales were made to other segments, mainly the Americas Group.
- Performance Coatings Group: Develops and sells industrial coatings for wood, metal and plastic applications. These include automotive refinishes and marine products. Its products are distributed by the Americas Group.
- Administrative Segment: Includes the expenses of corporate headquarters, as well as interest expenses, interest and investment income.
Competition: As we've noted, PPG and RPM International are among its competitors, but as it pointed out in its 10-K, there are many more. It wrote: "We experience competition from many local, regional, national and international competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products."
One of those other competitors is Benjamin Moore, which is owned by Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
2020 performance: On Jan. 28, it released its fourth-quarter and full-year results. The full-year highlights were:
- Consolidated net sales: up 2.6% to a record $18.36 billion.
- Diluted net income per share: increased 33.9% to $22.08 per share.
- Net operating cash: $1.09 billion higher to a record $3.41 billion.
- Ebitda: up 18.4% to $3.44 billion.
Those are all full-year figures for 2020; looking ahead to 2021, it expects diluted net income per share to rise to a range of $23.87 to $24.67 per share.
Growth: Generally, paint companies such as Sherwin Williams depend on housing starts and renovations of existing homes. In 2019, there was a wrinkle in that area. It wrote: "In the U.S. construction and housing segments, the recent demand for new construction has caused contractors to experience a shortage of skilled workers, resulting in project backlogs and an adverse effect on the growth rate of demand for our products."
It also expands through acquisitions, what it calls strategic acquisitions of businesses in the paint and coatings industry.
Fundamentals
Sherwin Williams earns a full five out of five-star rating for predictability. It has consistently grown its revenue per share and Ebitda per share over the past decade. A high predictability rating also has been connected to higher than average returns and lower-than-average odds of a loss.
Next, its financial strength:
Looking at the red on the top half of this table tells us why Sherwin Williams receives only 4 out of 10 for financial strength. This chart drives the point home:
It has an interest coverage ratio of 8.06, indicating that there is adequate operating income to cover its interest expenses.
Moving down the table, we see it has strong showings on both the Piotroski F-Score and the Altman Z-Score, the former indicating broad financial strength and the latter indicating there is no likelihood of bankruptcy.
Finally, the table reveals a better than six-point, positive gap between ROIC and WACC. Its return on invested capital is higher than its weighted average cost of capital, meaning the company is earning more on its capital than it is paying for it.
The operating and net margins are both in double-digits, but they have been volatile:
Note the level of return on equity. It is strong and suggests that Sherwin Williams has a competitive edge or moat. There are several points confirming that idea; they include the strength of its brand name, its scale, the breadth and depth of its operations and the loyalty of its customers.
The three growth lines: revenue, Ebitda and earnings per share without non-recurring items, are all good, although earnings do lag revenue and Ebitda.
Sherwin Williams pays a small dividend, yielding less than half the average of S&P 500 companies. A relatively low growth rate over the past three years means it won't amount to much, even in the medium term. As we see, the five-year yield on cost still amounts to less than 1.5%.
It also has been buying back its shares; the trendline on this 10-year chart (to the end of third-quarter 2020) shows the average reduction in shares outstanding has been 1.70% per year:
Valuation
Let's begin with a 10-year chart of the share price:
A couple of takeaways from the chart: First, Investors who have held Sherwin Williams over the past decade have enjoyed significant capital gains and, second, it is a relatively volatile stock, providing many opportunities to buy on dips (although not all dips are created equal).
The GuruFocus Value chart finds the stock to be overvalued:
Overvaluation is also the word after examining the price-earnings ratio. It is currently 34.12, while the 10-year median for the Chemicals industry is 23.03. It is also higher than its own 10-year median.
To factor in growth (Ebitda growth), we check the PEG ratio, which stands at 2.64, well above the fair value mark of 1.
All metrics argue that this is an expensive stock, which leads to the final takeaway: This kind of consistent growth is going to be costly for investors who don't want to wait for dips.
Gurus
Thirteen gurus have stakes in Sherwin Williams, and gurus, in general, have been buying more than they've been selling for the past two years:
The three gurus with the largest positions at the end of the third quarter were:
- Diamond Hill Capital (Trades, Portfolio) reduced its holding by 5.1% to end up with 256,834 shares, representing a 0.28% stake in the company and 0.99% of its total assets under management.
- Pioneer Investments (Trades, Portfolio) held 145,601 shares on Sept. 30, after adding another 45.67% over the quarter.
- Mairs and Power (Trades, Portfolio) owned 86,803 shares after adding 0.16% to its stake.
Conclusion
Sherwin Williams has been a powerhouse stock over the past decade, growing its revenue and earnings consistently and at a faster rate than its competitors. It does have a significant, but manageable amount of debt. Its high profitability means it is going to have ample cash to keep growing, both organically and with strategic acquisitions.
It is a pricey stock, trading well above its intrinsic value, which tells us the current owners are not giving up their holdings without receiving a premium price, while buyers are willing to pay that type of premium to access those earnings.
Value investors may like Sherwin Williams stock, but walk away because of the debt and the valuation. Growth investors will be more receptive, given the stock's predictability and growth history. Income investors will need to find other stocks.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
Read more here:
- UnitedHealth: A Buffett-Munger Stock
- Kansas City Southern Sees Strong Growth in 2021 and 2022
- Gurus Taking an Interest in Roper Technologies
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
