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