Has Sherwin-Williams Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Sherwin-Williams (NYSE: SHW  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sherwin-Williams.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.4%

Fail

 

1-Year Revenue Growth > 12%

9.2%

Fail

Margins

Gross Margin > 35%

43.7%

Pass

 

Net Margin > 15%

6.2%

Fail

Balance Sheet

Debt to Equity < 50%

80.9%

Fail

 

Current Ratio > 1.3

1.04

Fail

Opportunities

Return on Equity > 15%

31.8%

Pass

Valuation

Normalized P/E < 20

24.74

Fail

Dividends

Current Yield > 2%

1.1%

Fail

 

5-Year Dividend Growth > 10%

4.4%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Sherwin-Williams last year, the company has lost another point, bringing its total loss since 2010 to three points. Slowing revenue growth held the paint-maker's score back but, until yesterday, the stock did nothing but soar, rising 70% over the past year.

Sherwin-Williams is best known for its paint and, across the industry, paint manufacturers have done extremely well recently. PPG Industries (NYSE: PPG  ) and Valspar (NYSE: VAL  ) have both posted substantial stock gains of their own. Yet, none can stand up to Sherwin-Williams' recent returns, as the company fetches a premium valuation compared to its competitors, in part, due to superior financial metrics.

One challenge that Sherwin-Williams has seen is increasing costs for raw materials. DuPont (NYSE: DD  ) has been able to increase prices for titanium dioxide, an important pigment for paint production, seemingly at will, although its recent earnings weakness came largely because of weak titanium dioxide demand. Still, Sherwin-Williams has been able to pass on higher costs to consumers, supporting its own margins.

Moreover, macroeconomic trends are finally starting to move in Sherwin-Williams' favor. Just as Home Depot (NYSE: HD  ) has soared on hopes that the housing market's nascent bounce off lows earlier this year will persist, so, too, are investors, who are optimistic about demand for Sherwin-Williams products as money returns to home purchases and remodeling.

Yesterday, though, Sherwin-Williams disappointed investors. Despite beating earnings-per-share estimates by a nickel, the company missed on revenue, and guided fourth-quarter revenue growth figures down. The stock plunged 8% on the news.

For Sherwin-Williams to improve, it needs to take full advantage of any improvement in housing to reignite its growth engine, and let earnings catch up with its valuation. Otherwise, the stock's big gains could be short-lived, and Sherwin-Williams might take a long time to get anywhere near perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess, and learning how to separate out the best investments from the rest.

With its own retail operations, Sherwin-Williams has found success, but the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.

Click here to add Sherwin-Williams to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Home Depot and Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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