Security Analysis

Buying Spree continues with Sherwin-Williams (SHW)

If the current buying spree continue, I will have to rename the blog ” a stock a day”, as that’s how to best describe the week so far. In the previous article, I mentioned I might establish a position in Sherwin-Williams (SHW). After very little deliberation and positive words from Jeff of Circle of Competence, I have decided to make the jump. Appearing in the magic formula screen for the past week or so, Sherwin-Williams currently appears in the magic formula screen for the top 50/100 companies with a minimum market cap of 2000 million.

I hesitated a bit due in large part to current market conditions. As posted earlier, our family business mainly deals with selling equipment to chemical companies (paint, polymers,etc.).Nevertheless, part of being a contrarian is buying during bad times and selling during good times. Here is what Jeff had to say about Sherwin-William (SHW):

I’ve done the work on SHW, and own a few shares myself. Very good company, very well run, dividend up for 35 years, etc. The whole deal. Returns on capital are through the roof, cash flows through the roof. Not incredibly cheap, but definitely cheap. The industry is being subject to serious pricing pressure, but Shewin has the franchise to be able to push the costs through. They have an international segment growing fast enough to buffer a US slowdown: earnings and cash flow will probably be stagnant but not on the decline this year and next. After that, cash flow can continue to grow at modest rates, dividends will still rise, and they are buying back shares. It’s a nice company. Comparable to the Berkshire owned Benjamin Moore.

The Business According to Yahoo Finance Profile:

The Sherwin-Williams Company engages in the development, manufacture, distribution, and sale of paints, coatings, and related products to professional, industrial, commercial, and retail customers in North and South America, the United Kingdom, Europe, China, and India. It operates in three segments: Paint Stores, Consumer, and Global. The company was founded in 1866 and is headquartered in Cleveland, Ohio.

Commentary

A pretty consistent company selling near its 52 week low. The company currently sports a pre-tax earnings yield of 14%. Not exactly spectacular but meets my minimum requirement. Over the past 10 years, SHW has averaged ROE above 24.5%, but has currently been rising for the past 5 years and ROA of 8.5%. Until recently, its P/E has averaged 13, but currently sports a P/E of 10 and a forward P/E of 11.

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