About Sherwin-Williams 

Sherwin-Williams (NYSE: SHW) is the largest paint company (according to revenue) on planet Earth.

They manufacture and sell paint (and primers) across the globe, operating stores in over 120 countries. However, a large chunk of their business is handled in the United States.

The Cleveland-based company has been around since 1866, currently operating nearly 2,100 stores worldwide. What started as an initial $2,000 investment by Henry Sherwin (later came Edward Williams) stumbled with preliminary partnership dissolvements has since run full speed to the top.

This is the company that covers the earth.

Sherwin-Williams’ Numbers

Since the beginning of 2017, Sherwin-Williams’ stock has delivered investors a 247% return on their investment. Not to be overly simplistic, but at MacroHint, we love when companies, over a five-year period, maintain shallow and steady uptrends and lack of major, sudden fluctuations in their stock price.

The company’s market capitalization stands at nearly $64 billion, and it bagged nearly $20 billion in revenue in 2021.

SHW currently maintains a price to earnings (P/E) ratio of 33.51. This is noticeably higher than the standard “above 20 is overvalued” rule. In the end, unless you feel an urgent need to pay a premium for Sherwin-Williams, you’re better off waiting for the stock to fall 20-25% from its current share price.

It’s almost as if the stock has performed a little too well!

Sherwin-Williams’ Stock Fundamentals

Fundamentals, here we come.

The company oversees nearly $21 billion in total assets and just over $18 billion in total liabilities. While these number can be seen as a little too close for comfort, it is fairly encouraging that the majority their total liabilities is categorized as “long term” (giving the company more time to pay down debt gradually), as opposed to current (annual) liabilities. Specifically, since the majority of their debt is long term, they’ll likely have little to no problem paying it down over the long term.

SHW’s net income has increased overall between 2016 and 2020 and their total cash from operations has steadily gone up within that time frame as well.

Let’s see how good Sherwin-Williams is at making money!

Their annual net profit margin touts itself above the industry average at 10%; a good margin but not a great one.

According to every primary growth rate metric, Sherwin-Williams needs some work! For instance, their annual earnings per share and revenue growth falls well below the industry’s average. We believe this means the company has the opportunity to better manage its available resources better and continue innovating as much as they can for the sake of increasing revenue. While Sherwin-Williams is a big company and you can only innovate paint so much, it’s imperative that they find ways grow in line with their stock price.

This is likely the main reason the company’s P/E ratio is high.

However, it’s not all bad!

Sherwin-Williams does a pretty good job achieving returns on their investments, assets, and equity. They lead the industry’s average in all these categories by considerable margins. This is likely one of the perks of being the definition of an industry leader.

Sherwin-Williams’ Subsidiaries

Since we have discussed the company’s astronomic growth since its inception, it’s only fitting we discuss one of Sherwin-Williams’ main sources of (inorganic) growth, acquisitions.

As a small aside, it should be understood that acquisitions are expensive, even for multibillion dollar global corporations. Companies who are looking to purchase other companies must have a certain level of conviction in their potential subsidiary. By the same token, investors ought to be critical of where a company puts their resources to work.

This is important to mention given that if investors, from hedge funds and company board members to ETF managers and retail investors like you and me, have a direct incentive for the company to do well; we need to always make sure our money is working for us.

Mergers and Acquisitions 

Additionally, a common issue that arises is whether a company is paying a fair price for another. This has been discussed in recent years as it relates to some of the more well-known mergers and acquisitions made. For example, some have been critical of Walmart’s 2018 controlling stake acquisition, worth $16 billion, of Indian ecommerce company, Flipkart, alleging that Walmart paid too much for the subsidiary. In more recent history, there have been more critics of Occidental Petroleum’s sizeable purchase of Anadarko Petroleum, valuing the deal at $55 billion, over triple what Walmart paid for a majority ownership stake in Flipkart. Similar to Walmart’s acquisition, the investment community largely criticized Occidental for supposedly paying too much for Anadarko.

At MacroHint, we understand that not paying an insane premium for another company (or any asset for that matter) is important and a sign of how well a company uses and manages its financial resources. However, regardless of whether or not Walmart or Occidental overpaid for their respective subsidiaries, as long as value is added to the company’s long-term viability and they are creating a considerable gap between themselves and the competition, we are generally happy investors! As long as our team sees the synergy in the acquisition and sees enhanced shareholder and customer value as a result, what’s a little short term headline craze and stock price volatility compared to the following decades of increased market share (of course, within the FTC’s and DOJ’s antitrust standards)?

All in all, whichever companies or businesses a major corporation such as Sherwin-Williams chooses as their subsidiaries can speak volumes for their growth and general business strategies moving forward. While some businesses in the past have bought out smaller companies in hopes of tapping into a brand-new market and using the resources and intellectual property of their new subsidiary, this has proven not exactly fruitful in recent history.

However, Sherwin-Williams has done acquisitions correctly in the past.

Specifically, one of the companies more notable acquisitions was their merger with Minneapolis-based paint(s) and coating(s) manufacturer, Valspar.

This is likely the primary deal that solidified Sherwin-William’s dominant presence in paints for the foreseeable future. The acquisition was completed on June 1^st, 2017, and reportedly cost $11.3 billion.

The merger was likely worth every cent as it likely provided customers more options through SHW’s focused innovation as a result of the merger, as well as likely invoking greater overall shareholder confidence regarding their investment(s) in Sherwin-Williams going forward.

Sherwin-Williams’ Future

Our subsidiary tangent aside, given their ability to retrieve returns on what they put in and their generally solid to strong fundamentals, they should have little to no problem paying down their debt. It should be noted that the company is somewhat highly leveraged (uses a considerable amount of debt). However, as long as the company management team isn’t overleveraged and continues staying at the top of the paint industry, we don’t see potential for any major company-induced setbacks.

Additionally, it would be unwise if we did not discuss the correlation between the global real estate market and Sherwin-Williams’ performance.

When more houses are being built, the demand for paint increases. While houses need paint and more houses being built means more paint is needed, the company’s stock price doesn’t seem to be easily (negatively) impacted by housing crises or market downturns.

Specifically, during the Global Financial Crisis (2008-2009), one of the most volatile periods endured in commercial real estate ever, Sherwin-Williams’ stock price didn’t take any major swings in one direction or the other.

While history does not have a direct correlation to the future, it can be a helpful indicator.

Shares of SHW also dipped approximately $30 at peak-COVID (March 2020), which, for a company that was trading around $160 (and has since rebounded strongly) is barely a short-term dent in share price, especially if you invest with a long-term outlook.

As an aside, the company’s stock has also performed fairly well amidst current supply chain scares, which is no small feat given the number of major corporations that have struggled and are still struggling.

Overall, we like the shallow uptrend (over the last five years) in Sherwin’s stock over the long haul so far!

Should you buy Sherwin-Williams stock?

Sherwin-Williams is not one of the industry leaders in paint; they are the leader.

The company’s stock is a blue chip, buy and hold.

While the company’s shares are currently, objectively overvalued, our team will be thinking about buying this stock when it gets knocked down a few percentage points on the next bad market day; there are likely to be many in the near future.

Given their industry-leading position, their solid margins, and steady future demand, we currently give the company a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed as or understood as any form of formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.