Sherwin Williams (NYSE:SHW): Who said nothing good comes out of Cleveland?

Sherwin Williams (NYSE:SHW) is a 157-year-old paint company from Cleveland, Ohio.

This week’s international stock of the week is one we’ve been watching for a while but think now is a good time to consider it. Theoretically, a paint company should only be growing at GDP. But it has managed to deliver a heck of a lot more for its shareholders.

 

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Overview of Sherwin Williams

Sherwin Williams sells paint to 120 countries around the world. It has over 5,000 stores and branches of its own (roughly 4,200 of which are in the USA with 246 in Canada, 310 in Latin America and 86 in the Caribbean), 136 manufacturing and distribution facilities and it sells into 120 countries.

It evidently a great company culture – CEO John G. Morikis has only been in the hot seat since 2016 but has been with the company for nearly 40 years and worked his way up over time. It has very low turnover for a retail company because its staff are not your typical ‘check out chicks or guys’, they are essentially account managers for customers (particularly commercial customers that will keep coming back).

Sherwin Williams has raised dividends for 44 straight years, has huge control over its supply chains and has modest capex requirements (targeting <2% of sales in 2023).

During Morikis’ tenure, he has expanded the company’s reach abroad. Sherwin Williams went from $11bn in sales in 2015 to $22bn in 2022 and the company has expanded its presence abroad through strategic acquisitions. One was Australian brand Wattyl which it owned for 4 years before divesting it in 2021.

Although it has $9bn in debt, 91% of this is fixed and maturities span all the way out to the 2040s and early 2050s.

 

What next for the company?

As the market leader, the fate of Sherwin Williams will be intertwined with that of the broader industry. The US architectural paint industry used 868m gallons in 2021 with the largest share being used by DIY painters (at 39%). Then professional residential repainting with 32%.

After previously peaking at ~800m gallons in 2004, there were several years of declines – bottoming out in 2009. But only now has it surpassed the pre-COVID peak. And the industry is different from what it was in 2004. Back then, the typical square footage of a houses have grown 23%. So there’s a lot more to be needed.

You name any generation and their life moves will need paint of some sort. Baby Boomers are downsizing and/or moving to assisted living facilities. Gen X and millennials are upsizing, or perhaps buying homes for the first time. And fresh paint is one of the best ways to add value to it. On top of that, the balance between Professional and DIY is returning to the pre-COVID norm where the former segment was more dominant.

Sherwin Williams is well positioned to capture more than its fair share of the new market opportunity with its constant innovation, superior stores and customer service. Investors have been concerned about supply chain issues and cost increases for construction companies, but this company has been unaffected.

As a side note (to illustrate what this company is about), take a look at its 2024 Colour of the Year – Upward. It is a shade of blue that is meant to reflect gentle, forward momentum.

 

Introducing our breezy, blissful 2024 #SWColoroftheYear. Order a free color chip: https://t.co/C7gEULHkAt pic.twitter.com/fJUgpsLn5V

— Sherwin-Williams (@SherwinWilliams) September 20, 2023

 

What is the company worth?

Sherwin Williams is covered by 24 analysts on Wall Street. Consensus estimates for FY23 (which is the 2023 calendar year) call for US$27.8bn in revenue and $9.76 EPS (on a normalized basis), up 2% and 11%. Looking to FY24, and the analysts expect $23.6bn in revenue and $10.77 EPS (up 3% and 10% respectively).

The mean target price is $297.12, a 14% premium to the current share price which represents a FY24 P/E of 24.1x. We think this company is worth US$342.09 a share, a 33% premium. There is every reason to expect that Sherwin Williams can achieve this. In the last quarter, it increased sales by 6% on a consolidated basis – net sales form stores in the US and Canada open for over 12 months were up 9.5% year on year.

Although it expects sales to be more flat in the current quarter, it expects $9.30-$9.70 per share EPS having previously guided to US$7.95-$8.65 per share. So, Sherwin Williams is not one of those companies that will just be a ‘big company’ forever – it is a long-term growth prospect.

 

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