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Sherwin-Williams’ stock price keeps hitting new highs. Is it time to sell?

By: Ryan Fulmer
Sunday, May 7, 2017

It’s true! Sherwin-Williams’ stock price has been on a roar for several years--outpacing the broad stock market and industry peers by a wide margin. If you had invested $100 in Sherwin-Williams in 2011, it would now be worth around $325--versus $250 for the S&P 500 and $200 for industry peers.
 
Last year marked the 38th consecutive year the company’s dividend has been increased, with 2015 seeing an increase of 25%. Additionally, management has reduced the outstanding shares of the company by almost 30% since 2007, increasing the earnings and dividends each shareholder receives.
 
Much of the company’s latest success has been driven by the recently-retired CEO who ran the company from 1999 until early 2016. Under Christopher Connor’s careful watch, the company generated nearly 10x returns for investors and over $22 billion in market capitalization change (Harvard Business Review)!
 
I am sure you are wondering how a paint business can generate such superior results. Let’s dig into how exactly Sherwin-Williams does it.
 
It might surprise you to learn that slightly more than 10% of revenue is from retail customers, and more than 60% is from company-owned paint stores selling mostly to commercial clients. Additionally, they have a global finishes business and Latin American operations, which, when combined, account for less than 25% of revenue.
 
Whenever you look to invest in a company, it is important to understand why customers choose their products and, more specifically, what unique competitive advantage they have that will drive excess shareholder returns.
 
Sherwin-Williams’ unique competitive advantage is their company-owned store distribution. According to MarketVision Research, over 50% of professional painters choose Sherwin-Williams to be their primary paint supplier over leading brands like Benjamin Moore, Home Depot, Glidden, and others.
 
With more than 4,000 stores and 2,500 sales representatives, Sherwin-Williams has strategically added to their footprint every year. They have found that proximity to their professionals is one of the biggest drivers of their success--combined with entrepreneurial store managers who are driven to build long-term relationships.
 
In fact, in the 2009 recession, when most of their competitors were closing paint stores, Sherwin-Williams decided to open 60-100 stores per year. Investors certainly were not expecting a cyclical business to be investing in the worst global recession since the 1930s, but management’s long-term view has certainly benefitted shareholders.
 
When looking to invest, the first step is finding a great company. 
 
-Does the company have a unique competitive advantage? 
-Has management been able to drive operational excellence compared to industry peers?
-Does management’s vision for the future align with your view for how the business should be run? 
-Does management allocate their capital in a shareholder-friendly manner?
 
The next step is to determine whether the company is selling for a reasonable valuation. As my father has always said, “the stock market is an auction marketplace because for every buyer there is a seller,” so it is important to understand why the valuation is expensive or cheap.
 
Next, I like to review the company’s price-to-earnings ratio relative to the S&P 500 and peers. Is the company’s valuation greater or lower? Is the difference justifiable?
 
Keep in mind, when making an investment in an individual stock, it is important to remember that you could be wrong. As a result, diversification is critical to building a well-thought-out investment portfolio, and Sherwin-Williams may be a company to consider.
 
Sources: Harvard Business Review, Company Reports
 
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits and has been ranked as one of the largest money managers in Northeast Ohio.
 

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