A Brighter Future With The Sherwin-Williams Company Stock (SHW) (2023)

Color of Money

Our background in the retail-wholesale paint business taught us the social anthropology of trending colors. Popular colors reflect the mood of the country. In 2023, The Sherwin-Williams Company (NYSE:SHW) claims their most popular colors are shades of off-white and grey.

The psychology of color suggests off-white and grey represent neutrality and balance, intellect and compromise, and purity and simplicity. As the prevailing neutral Hold Rating analysts assign to Sherwin Williams stock, Moody’s Corporation (NYSE:MCO) characterizes the stock with a nondescript “stable” tag. We think The Sherwin-Williams Company and its investors have a much brighter future.

The mood for global economic growth and equity market investing is grey and bland. Geopolitical challenges, threats of recession, persistent inflation, higher interest rates, China’s sputtering economy, and uncertain energy supplies dampened the mood.

Moody Stock Shock

Sherwin-Williams stock tumbled from $335 per share in December ’21 closing around $219 at the beginning of March ’23. The deep dive got traction from the mood among investors; the company's financials do not justify the steep drop in our view. Industrial stock prices plummeted in 2022, the worst year since 2008. According to Seeking Alpha,

The S&P 500 (SP500) slid 2.61% for February (2023) to end at 3,970.15 points, final figures showed on Tuesday, closing out a turbulent month marred by hotter-than-expected inflation data and concerns over the Federal Reserve's rate hikes. The S&P 500's accompanying SPDR S&P 500 Trust ETF (NYSEARCA:SPY) slightly outperformed the benchmark index, with a fall of 2.51%.

We believe there is a lot to like about having The Sherwin-Williams Company stock in portfolios of retail value investors. Shades of green symbolize money and luck, peace and intelligence, and the value of emeralds; we are green-lighting the Buy assessment of shares.

Company Staying Power

Henry Sherwin and Edward Williams founded the company in Cleveland in 1866. It operates through its Americas Group, Consumer Brands Group, and Performance Coatings Group.

Sherwin-Williams manufactures, distributes, and sells paints and coatings for consumer, commercial, and industrial applications. It is a diversified supplier of products to the architectural construction trades, maintenance, vehicle and transportation, aerospace, coil and extrusion, marine and steel, and packaging industries. The company has operations primarily in North and South America, the Caribbean, Europe, Asia, and Australia.

We are confident Sherwin-Williams is going to continue to prosper as should shareholders. There is a lot of underlying strength and the stock seems tethered to the market mood. The share price is fairly volatile; the Beta is 1.14, i.e., the price moves higher and lower more radically than when the market moves. For instance, on March 2, '23, the shares jumped $2.29% ($5.01) on no news, as the Dow Jones Industrial Average Index (DJI) rose 1.05%.

We foresee a potential opportunity for retail value investors to profit in the long term by accumulating shares in the neighborhood of $210 each. Our average 12-month price target is $240 to $255.

For the period ending:

12/31/2022 12/31/2021 12/31/2020 12/31/2019

Return on equity over the last year was 72.9%. Just this year, there were 32 buy transactions by corporate insiders compared to 13 sales of stock. At the end of 2021, 56 hedge funds owned shares. One year later, 65 owned shares with nearly 80% of the shares owned by institutions and funds. 19% of the shareholders own 50% of the company. These actors all appear as confident as we are in the future.

Adding to its assets, the name is a well-recognized consumer brand as are many of its subsidiaries; for example, there is Valspar, Purdy Brush, Minwax, Cabot Stains, and Dutch Boy. Financially, revenues are up the last few years while expenses moderated; assets and cash flow are up.

The board of directors continuously executed its stock buyback program over the past 5 years. The number of outstanding shares declined Y/Y usually near 2% but by 3.15% in 2021 over 2020. We might prefer the board to increase the dividend yield. On the other hand, Warren Buffett argued last week that buybacks benefit shareholders not just CEOs, as they lift per-share intrinsic value.

They raised the dividend over 43 consecutive years. It gets high marks for safety, growth, and consistency but is puny at a ~1% forward yield; it does not incentivize investors.

Since April 22, the Quant Rating measurement calculated the stock metrics improved assessing a move up from Sell to Hold. Most recently, the rating metrics define conditions improved enough to tilt the rating toward a Buy.

We expect the next earnings announcement on April 25, ’23. The last announcement in January ’23 was disappointing ($1.89/share) but actual EPS was higher than forecast ($1.84). We expect FY ’23 EPS will be near to 2022 ($8.74) and the EPS in Q1 ’23 will be about +$0.20 than Q1 ’22.

Healthy Future

Current metrics warrant an F grade for Valuation by some. Our valuation is higher basing our opinion on extrinsic factors as well as numbers. We are more bullish than others expecting greater U.S. economic growth and a more timid recession if any. This leaves the stock market room to potentially move higher this year and as the next election nears.

Second, our fair value at what the stock should be traded is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock traded at, adjustments for past returns, growth, and future estimates. We expect company earnings to increase by 30% to 35% over the next few years. To arrive at our average price of $240 to $255, we use this formula and slightly adjust it: we take the expected annual EPS for 2023 ($8.47) and 2024 ($9.91), add together, divide by 2, and multiply by the PE (FWD) of 26.4 = $242.6. We further consider the short interest rate but it is currently less than 1%, a negligible factor in this case. Over the last 4 quarters, the company beat EPS estimates 3 times.

Our attraction to the stock is the company’s consistent growth, innovation, and market power. Sherwin-Williams, in our opinion, is currently a good value based on its PE compared to the peer average 29x. According to Microaxis, 19 analysts have an average target price for Sherwin-Williams at $254.

Conversely, we are enthused that the gross profit for Q4 ’22 ending December ’22 was $2.23B or +18.84% Y/Y. The fiscal year increase in gross profit was over 9%. Company gross profits enjoy a progressive trend extending from 2009 through January 2023; partly responsible is top-ranking chemicals-paint-coatings for brand value:

Another reason we believe The Sherwin-Williams Company can be a potentially sound investment is its outstanding presence in the automotive paint segment. Sherwin-Williams and its subsidiary Valspar occupy two of the top five supplier spots. Automotive World projects 2023 sales will return to pre-pandemic levels. Growth might be close to 9%. Valspar is a leader in paints and coatings for railroad cars. Sherwin-Williams acquired Valspar in 2016 for $11.3B. It bought 16 companies over the years, 4 in the last 5 years: 88% in chemicals and 7% in construction.

Final Words

The Sherwin-Williams Company is a diversified manufacturer and supplier of products in high demand. It has a thriving business in product packaging, too. In our opinion, as we have written to investors in previous SA articles, the stock has potential if held for the long-term and purchased for around $210 per share. There are headwinds, the national economic and market moods not being the least, but we consider investing in The Sherwin-Williams Company the next best thing to investing in the American economy.

Sherwin-Williams might have dived with the withering mood of the economy and market but we expect a turnaround. Mr. Buffett says that his secret sauce is to pick the business and not be a stock picker. Paint is a great business—if not used today someone needs it tomorrow.

I write for retail value investors who cannot afford to lose money but sometimes like to take a risk. I speak for free to community and school groups. I was teaching business, social/political activism, and Middle East politics to international university students in Tel Aviv b4 the pandemic hit. I consult with startups and mid-level companies. I co-manage Goldmeier Investments LLC with my son Daniel. I founded the Sappanos Decorating Centers, Chicago, with more than 70 employees and real estate holdings in excess of $15m. I am a former Research and Teaching Fellow at Harvard and Assoc. Prof Tufts Medical School.