TICKER: SHW

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https://cdn.shopify.com/s/files/1/0884/0548/files/SHW.numbers?v=1620160300https://cdn.shopify.com/s/files/1/0884/0548/files/SHW.numbers?v=1620160300https://cdn.shopify.com/s/files/1/0884/0548/files/SHW.numbers?v=1620160Investment Summary

Sherwin-Williams is a fantastic business which has only gotten stronger through the acquisition of Valspar without diluting existing shareholders. With the company’s efforts focused on substantial debt reduction in the past few years, the balance sheet has improved significantly. This has also led to an increase in free cash flows, which is being used to return value to shareholders through dividends and share buybacks. With strong demand for paints and coatings expected to continue as the company moves past the pandemic, Sherwin-Williams is valued reasonably enough that the strong fundamentals will continue to outperform moving forward.

Investor Website: https://investors.sherwin-williams.com/investor-home/default.aspx

 

Business Model

Sherwin-Williams is engaged in the manufacturing, development, sale and distribution of paints and coatings. The company’s products and services are marketed to commercial, industrial, professional and retail customers. SWH classifies its products into two categories, namely Paints, Stains & Supplies and Industrial Coatings

The company operates under three discrete business segments namely -

The America’s Group (TAG)
Consumers Brands Group (CBG)
Performance Coatings Group (PCG)

The company’s sales are based approximately 80% in the US and Canada, whereas the remaining 20% are sold in the rest of the world. Even so, the company’s geographical footprint revealed that there are many markets that are largely untapped. Long-term, these marketers are expected to provide ample opportunities for future growth and operational expansion. The multiple scalable business opportunities of SHW at different locations plays an important role in enabling SHW to capture emerging opportunities. The company’s diversification has also enabled it to perform resiliently during the pandemic. TAG is at the heart of the company’s growth profile. TAG outperforms the rest of the company’s segments in terms of revenue and margin growth.

 

Financial Performance

FY 20 sales witnessed a 2.6% YoY increase despite the impact of the pandemic. Fully diluted EPS increased by 33.9% YoY on impact of higher margins and share buybacks. The numbers reflect the management’s ability to adapt to challenges in a changing business environment. Lockdowns and Social distancing requirements have prompted many businesses to mandatorily shift to remote work and presented the company to grow sales in the Residential Repaint to offset the impact of sales on New Commercial and Property Maintenance segments. As more businesses continue to weigh an extension to the Work from Home model, there should be growth in demand of Residential Repaint products, which will continue to boost the company’s sales going forward.

 

Increased Cashflows, Lower Debt

Despite being a capital-intensive industry, the company is remarkably non-capital intensive. The company targets a Capital Expenditure spend of under 2% of revenues. The company has also managed to increase margins and Free Cash Flow efficiency. Sherwin-Williams acquired Valspar in an all-cash transaction, which resulted in a significant increase in debt. This pushed the debt to 4x Debt/EBITDA. Since then, the company has been able to concentrate its strong cashflows on paying down debt as quickly as possible. After leverage peaked in 2019, the company has brought its debt down to 2.5x EBITDA in just two years.

Dividends and Buybacks Expected to Continue

Sherwin-Williams has also been aggressively creating shareholder value through buybacks and dividends. The company has invested more than $6 billion in share buybacks over the past decade, thereby reducing the share count by 14%. Additionally, the company has raised dividend pay-out for the last 43 years. Buybacks were paused and dividends only increase slightly when the company utilised its cash to focus on deleveraging the balance sheet. In 2020, the company returned to spending free cash flow on buybacks and dividends, with $2.2 billion being spent on buybacks, while dividends were raised by 23%. With an environment accommodative to growth moving forward, Sherwin-Williams is poised to continue delivering outsized dividend increases.

 

Valuation

The company has several macroeconomic tailwinds which will benefit it in the next few years. A major driver pf paints has been the increased new housing starts. This is expected to continue as the population gets vaccinated. The commercial business is also expected to have a string rebound thanks to the pent-up demand while new investment is expected to come from the federal infrastructure spending.

Currently, the company is trading at 32 P/E, which us slightly higher than the company’s 5-year average P/E of 29.2 but significantly higher than the industry median of 20.94. Investors are paying the premium due to higher margins and the significant FCF improvements due to debt reductions. The significant increase in the company’s ability to generate FCF suggests that dividend yield and share buybacks are expected to grow, which will drive long-term value creation.

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