Sherwin-Williams Is a Great Company, but Should You Buy the Stock?

The paint company is moving past its failed acquisition effort and will continue to impress investors. For those not currently in the stock, though, the entry price may be a bit high.

Apr 22, 2014 at 1:50PM

The Sherwin-Williams Company (NYSE:SHW) is an industry giant with incredible brand power and wide-reaching distribution, but is it a good stock to own? The $20 billion paint and consumer goods juggernaut has maintained a near-vertical trajectory for five years on the back of a housing rebound and amid other industry tailwinds, climbing nearly 240% in capital appreciation. Even as new housing starts appear to have slowed slightly from their precipitous climb in the past two years, Sherwin-Williams again posted better-than-expected results from its most recent quarter. The strength of the business in undeniable, but that may be baked into the stock, which trades at roughly 20 times forward earnings. At a premium price, Sherwin-Williams may be another example of a great company that isn't a great stock.

Another coat
While the past few months presented some tepidity in the home goods and housing sectors, Sherwin-Williams had no trouble achieving a record quarter, with sales up more than 9% to just under the $200 million mark. The gains came from a mix of organic sales growth boosted by acquisitions -- the latter being the primary growth driver for the mature company.

Acquisitions were responsible for 4.5% of the consolidated sales bump.

Interestingly, the paint stores segment was the biggest winner, with a more than 16% climb. Same-store sales jumped nearly 8%.

One of the biggest stories in recent news for Sherwin-Williams was the now-defunct acquisition of Comex -- Mexico's paint maker and distribution giant, which is the fourth largest in North America. The $2.34 billion buyout initially agreed upon in 2012 would have doubled Sherwin-Williams' revenue, though at the beginning of this month it was finally nixed after multiple issues. Between Mexican regulators unwilling to let the company go to a U.S. conglomerate and Comex's own internal reluctance to sell itself, the deal resulted in a breach of agreement after March 31.

Where investors should stand
The breakdown of the Comex deal led to a short-term sell-off, but investors shouldn't be too concerned. For one thing, Comex was bargaining for concessions that materially lessened the appeal to Sherwin-Williams and ultimately investors. The added revenue and earnings would have been great, but the company now has a boatload of options for its best deployment of capital. It could engage in a significant shareholder return strategy, or focus its effort on another major acquisition.

Organic sales, hurt slightly by foreign exchange issues, continue to grow comfortably for a company of this size.

Perhaps the biggest thing holding Sherwin-Williams back today is its valuation. At 20 times expected earnings and with a trailing EV/EBITDA of nearly 16 times, this is a pretty pricey stock considering the size and maturity of the business. As mentioned, Sherwin-Williams is growing comfortably (consolidated sales guidance for the current year implies an 8%-13% gain) and will benefit in the long run from more acquisitions and returning cash to shareholders, but there are businesses of a similar stature and state trading at more appealing multiples. DuPont, a company three times the size of Sherwin-Williams and with a broader product catalog, trades under 14 times earnings and has an EV/EBITDA of 11.6 times. The company also pays an attractive 2.7% dividend.

Sherwin-Williams is making the right moves and should remain appealing to its existing investors, but those looking to get in on the multiyear run may want to look elsewhere for capital appreciation.

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