Is This Paint Retailer a Buy Right Now?

The past earnings season has brought to light two sides of the chemical industry: companies whose pockets are getting heavier from soaring product prices, and those whose shoulders are burdened with high material costs.

As for Sherwin-Williams (NYSE: SHW  ) , high input costs ate into the paint retailer's higher revenues in its second quarter, and it failed to boost its bottom line. This might dampen your excitement about the stock, but the recent numbers aren't enough to tell us whether the stock is worth the money. So let's dig deeper to see how Sherwin looks in the longer run.

Operational performance
Rising raw-material costs have been weighing on Sherwin's margins for some time. As a result, the company has been raising product prices, as most other paint companies have. Hence, higher selling prices and demand for its paints have helped its top line grow by 13.3% this year. What's noteworthy here is how far this rate has come from a meager 1.8% over the past half-decade.

Sherwin's bottom-line growth has shown an impressive increase, from a negative 1.1% over the past five years to a positive 9% one-year rate.

However, one important development hurting Sherwin's sales is Wal-Mart's (NYSE: WMT  ) decision last year to drop Sherwin-Williams paints from its shelves in exchange for products from Amsterdam-based Akzo Nobel NV.

Growth and stability
Sherwin has been quite aggressive in widening its business reach. In addition to launching new products and marketing initiatives, it added a net 36 stores last year and has plans for another 50 to 60 new stores this year.

The Cleveland-based company has also made some acquisitions, which have added 3.4% to Sherwin's net sales in the past year and 5.1% in the second quarter.

These growth moves have resulted in a fairly high total debt-to-equity ratio of 70%. However, most of this is short-term debt, and an interest coverage ratio of 13.8 also suggests that the company's in a comfortable position in servicing its long-term debt obligations. At the same time, the cash position appears a bit tight, and a dividend payout of 31.4% may also seem high for its high debt levels and low cash.

But is the stock cheap?

Value insights  
Let's see how Sherwin's valuation stacks up next to its peers.

Company

Trailing P/E

Forward P/E

P/S

P/BV

Sherwin-Williams 16.7 15.0 1.1 4.6
Valspar (NYSE: VAL  ) 15.3 11.5 1.07 1.9
RPM International (NYSE: RPM  ) 13.0 11.9 .94 1.9
PPG Industries (NYSE: PPG  ) 11.8 10.4 1.01 2.9
Ashland (NYSE: ASH  ) 11.1 9.68 .38 0.8

Source: Capital IQ, a division of Standard & Poor's.

Sherwin's price-to-book value remains high, but that might not necessarily mean the stock is overvalued. Since Sherwin's ROE is decent at 30.2%, even for its high debt levels, the market seems to have factored in the company's earnings potential into its price.

Sherwin might look expensive on the basis of its trailing P/E when compared with its peers. But a lower forward P/E indicates how earnings are expected to grow in the future. As such, the stock doesn't seem particularly expensive given its earnings strength and growth expectations.

Sherwin's dividend-paying history has also been excellent, with 2010 marking the 32nd consecutive year when it increased dividends, and the current yield is at a moderate 2%.

The Foolish bottom line
I feel the only major concern weighing down on Sherwin right now is high input costs. The valuations may look a little expensive now, but any dip in the stock price could be a good time to consider entering.

Stay updated on Sherwin's news and analysis by adding it to yout stock watchlist.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article.

The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Sherwin-Williams and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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