Sherwin-Williams - Shares Are Valued Fairly High Despite The Nice Comex Acquisition

| About: The Sherwin-Williams (SHW)

Shares of Sherwin-Williams (SHW) ended Monday's trading session with gains of 5.8%. The manufacturer and distributor of paint, coatings, and other related products announced the acquisition of Comex.

The Deal

Sherwin-Williams announced on Monday that it will acquire Mexican-based Comex, a leader in the paint and coating market in Mexico. Sherwin will pay $2.34 billion for the company, including debt, in an all cash transaction. Sherwin will issue new debt to finance the deal. It will continue to pay dividends, but share buyback programs will be reduced for the coming two years.

Comex sells coatings through 3,300 points of sale in Mexico and it has operations in the US and Canada as well. Sherwin focuses on high-quality architectural paints and coatings. The company operates 16 manufacturing sites which employ 7,200 workers.

CEO and Chairman Christoper M. Connor commented on the deal, "Sherwin-Williams and Comex Group are an ideal fit in every respect - geographically, strategically and culturally. This transaction will significantly increase our presence in markets where our store count is low, it builds upon our strategy to grow our architectural paint business in the Americas and it brings a high-quality, dedicated team of employees to Sherwin-Williams. We are proud to welcome such a well-respected company and their employees into the Sherwin-Williams family."

For its full year of 2011, Comex reported $1.4 billion in annual sales. The deal values the firm at 1.7 times annual revenues. Comex generated 66% of revenues in Latin America, the majority of it in Mexico, and the remainder in the US and Canada. Some 75% of total sales are generated in the architectural segment.

The deal will be dilutive to earnings per share in the initial quarter after completion of the deal, but is expected to be accretive to earnings per share in the first 12 months.

The deal is subject to customary closing conditions, including regulatory approval.


Sherwin-Williams ended its third quarter with $55.2 million in cash and equivalents. The company operates with $969 million in short and long term debt, for a net debt position of roughly $914 million.

For the first nine months of 2012, Sherwin-Williams generated revenues of $7.31 billion. The company net earned $563.0 million, or $5.37 per diluted share. Full year revenues are expected to come in around $9.5 billion. Full year earnings could come in around $675 million, or between $6.35 and $6.55 per diluted share.

Factoring in Monday's share price gain, Sherwin is valued at $15.4 billion. This values the firm at 1.6 times annual revenues and 22-23 times annual earnings.

Sherwin-Williams currently pays a quarterly dividend of $0.39 per share, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Sherwin-Williams have risen an incredible 67%. Shares rose steadily from $90 in January to all-time highs of $156 last month, on the back of a recovery in the US housing market. After Monday's announcement, shares are exchanging hands at $149 per share.

Over the past five years, shares have steadily risen from $50 in 2008 and 2009 to its current levels. Between 2008 and 2012, Sherwin increased annual revenues from $8.0 billion to an estimated $9.5 billion. Net earnings rose from $477 million to an estimated $675 million this year. In the meantime, the company retired roughly 10% of its shares outstanding.

Pro forma, the combination will report annual revenues of roughly $11 billion. The deal adds roughly 18% in annual revenues and the deal multiple of 1.7 times revenues is fair given Sherwin's own valuation of 1.6 times. The deal will boost Sherwin's presence in markets where store count is low and boost its presence in fast growing Latin America. All in all, I think the deal is an excellent addition for Sherwin which offers an attractive growth profile in Latin America at a nice price.

Yet, I refrain from investing in the company's shares. A near 70% return in 2012 has driven the price-earnings ratio to 22-23 times annual earnings, a bit too colorful for a painting company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.