Is Sherwin-Williams Really Worth More Than $150?

Pricing fatigue is wearing on paint giant Sherwin-Williams (SHW +0.22%), though its stock seems to have gotten a second wind following a disappointing third-quarter earnings report.

Profits were still being painted black, as paint-store segment sales jumped 10%, allowing margins to widen to 19.3% from 16.7% from a year ago, while consumer and international segments saw revenues dip. However, price increases initiated earlier in the year ameliorated the worst of it. Coming as they did before the price of titanium dioxide eased back, the paint maker should see its input costs lessen even as the price of a gallon of paint maintains its elevated level.

Sherwin's stock, which initially tumbled with the results, bounced right back, even hitting a new 52-week high, so let's take a closer look at whether the paint maker will just whitewash those previous pricing worries.

Sherwin-Williams snapshot

Source: FinViz.com.

Highfalutin honeys
Titanium dioxide is the whitest substance on Earth and is found in everything from sunscreen and toothpaste to food coloring and vehicle coatings. I like to note that even the creamy center in Oreo cookies is enhanced by TiO2.

As global demand for autos and home appliances jumped, particularly in the emerging economies of China and India, the price of the additive climbed and got an extra boost when Japan's earthquake and subsequent tsunami disrupted supplies at Sakai Chemical. With little new capacity coming online any time soon, it turned into one of those perfect storms, creating a huge supply imbalance. Throughout 2011, DuPont (DD +0.00%) and Dow Chemical (DOW +0.00%) enjoyed record profits, but the paint started to crack earlier this year, when Kronos Worldwide (KRO 0.47%) started anticipating that margins would contract because of customer's inability to pay continuously rising costs.

The dam finally burst, and DuPont saw its adjusted profits come in well below analyst expectations, though there was more than just that one specialty chemical that tinged results. Yet Huntsman (HUN 0.71%) fell, too, and Kronos has only just recently reversed course.

I'll drink to that
Like Sherwin-Williams, coatings maker Valspar (VAL +0.00%) is also feeling the effects of uneven international demand, though it, too, ought to benefit from falling input costs. Indeed, the slide shows no signs of abating. Although fourth-quarter price cuts are more modest than those seen in the third quarter, producers say they're still sharper than those experienced over the past six months, as alternatives to TiO2 are sought out.

Shares of Sherwin-Williams have long carried a premium price to those of the company's rivals, as its paints offer diverse appeal, from housing to office buildings, architectural coats to auto and aerospace. Domestic sales are outperforming its global business at the moment, and should housing ever really get its footing again, the paint maker will see profits widen even further. Yet it spreads out the risk through timely acquisitions, and its massive buy of Mexican paint-store behemoth Comex for $2.3 billion makes it a major player south of the border.

I've bet against Sherwin-Williams for some time on Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars. My underperform rating continues to lag, as the stock has jumped 44% since I weighed in on it back in March, compared with a 2.5% gain by the S&P 500.

By making a CAPScall here, I hold myself accountable for the bearish opinions I've expressed, but I think it might be time to close out that call. Tell me in the comments section below whether you agree there's no reason not to think Sherwin-Williams won't leave me black and blue if I leave it in place. At a price north of $150, the paint maker should remain a bargain.