It stands to reason that as housing stocks like Lennar (LEN) and PulteGroup (PHM) rocketed higher in 2012, paint and coatings manufacturer and retailer Sherwin-Williams (SHW) would follow suit as homeowners gussied up their properties prior to putting them on the market or buyers renovated their new acquisitions.
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That stock chart, combined with the profit margin recovery portrayed in the next chart, together paint a pretty picture of Sherwin Williams’ current position. What the charts don’t show is that the company’s improvement isn’t just do to selling more of its paints and coatings, but to capturing higher prices on those sales, thanks in part to its ability to control pricing by selling more than two-thirds of its annual volume through its own stores. While homeowners themselves may opt to snap up a few cans of paint at a local hardware store, contractors and other professionals tend to prefer heading to paint stores – and that’s the large volume, repeat business. Given the jump in new home sales reported late last month (the Census Bureau reported they hit an annual rate of 377,000 for November, up 15% from year-earlier levels) to the highest level in more than two years, odds are that those contractors will be painting a lot more new homes in the coming months. The relatively high PE ratio reflects that expectation, not just the improved results of the trailing 12 months.
To make the picture look even more glossy and appealing, Sherwin Williams is in expansion mode. It recently agreed to acquire Mexican architectural and industrial coatings company Consorcio Comex SA for some $2.34 billion, including the assumption of debt owed by the Mexican company. That will give Sherwin Williams an opportunity to boost its distribution in Mexico as well as the western United States, which may well more than offset any additional risk created by the company’s higher debt load. That might be more of a concern for debt investors, but unless there’s an unexpected setback that would impair the company’s cash flow, the odds are that it should be able to manage interest payments out of its (increasing) cash flow.
Rating agencies may have placed Sherwin Williams on review pending a downgrade in light of that acquisition, but that shouldn’t alarm equity investors. Any downgrade would still leave this company solidly in investment-grade territory, and the only real concern is that it won’t be able to achieve the same magnitude of gains in earnings, cash flow and stock price that it did in 2012. But that leaves a lot of room for upside…
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at email@example.com.