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Shares of Sherwin-Williams (NYSE: SHW ) hit a 52-week high yesterday. Let's look at how it got here and whether clear skies are ahead.
How it got here
During the recession and housing crash, home improvement was the last thing on people's minds; they were just happy to stay in their homes if they could. But now that we're slowly emerging from our economic mess, a splash of new paint is just what the doctor ordered and sales are going through the roof.
In the most recent quarter, Sherwin-Williams saw sales jump 15.1% overall and 20.9% in the Paint Stores Group. Net income per share rose from $0.63 a year ago to $0.95 and beat estimates for the third straight quarter.
The rapidly improving performance has caused a jump in Sherwin-Williams' shares, but it's not the only home company tied to home improvement that's moving higher. Fellow paint-maker Valspar (NYSE: VAL ) has followed a similar path over the past year and retailers Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) have recovered some of their losses, although it's a longer road to recovery for them.
Valuation metrics show that Sherwin-Williams is outperforming its home improvement counterparts as well. Revenue growth is at the top of the list and return on assets trails only Home Depot.
Return on Assets
Quarterly Revenue Growth
Source: Yahoo! Finance.
The downside is that part of Sherwin-Williams' rise is from a P/E multiple expansion, so the company needs to continue to grow to live up to higher expectations.
In the short term, the good news is that management expects sales to increase 10% to 15% in the second quarter and earnings per share to reach $1.92 to $2.07. They also raised full-year net income estimates to $5.75 to $6.05 per share. The continued momentum is a positive sign, but I'm worried it isn't enough for this paint maker to grow into its higher valuation.
Despite signs of improvement, the housing market is anything but healthy and I would rather look at it as a value play right now than a growth opportunity. If I had to choose one of these companies I would go with Lowe's for value and growth across a wider range of products.
The CAPS community is tepid as well, giving the stock a three-star rating (out of five). The stock could certainly keep rising from here, but earnings estimates are getting higher and as the stock goes up so do expectations, not a place I am willing to bet on in housing.