Sherwin Williams Is A Favorite Company But Its Stock Is Getting Overvalued

| About: The Sherwin-Williams (SHW)

Sherwin Williams Co. (NYSE:SHW) is one of the largest producers of paints, varnishes and application equipment much of its sold through 3500+ retail paint and wall covering stores; in addition, it produces auto coatings which are sold through auto coatings outlets. The company has grown profits and dividends at a 9-11% pace over the last 10 years earning a 20%+ return on equity. The company's revenues and profits suffered in the recent economic downturn and should continue to be impacted as long as the construction and housing markets lag. Looking forward, earnings should rebound and grow at an above average pace as a result of:

(1) improving U.S. and international sales in autos, OEM product finishes and protective and marine coatings,

(2) aggressive expansion overseas,

(3) a major re-organization that will reduce costs, improve productivity and generate cash flow that will be used to reduce debt and buy back stock.

(4) acquisitions.


(1) its retail paint stores may be impacted by U.S. economic weakness,

(2) a poor pricing environment in the consumer segment,

(3) rising material costs.

SHW is rated A by Value Line, has a 29% debt to equity ratio and its stock yields 1.8%.

Statistical Summary

Stock Yield Dividend Growth Rate Payout Ratio # Increases Since 2001
SHW 1.8% 8% 28% 10
IND* 1.5 8 30 NA
Debt/Equity ROE EPS Down Since 2001 Net Margin Value Line Rating
SHW 29% 29% 2 7% A
IND* 26 18 NA 5 NA

* IND is the average of the Retail Building Supply Industry as compiled by Value Line


Note: SHW stock made good progress off its April 2009 low, surpassing the down trend off its July 2007 high (red line) and the November 2008 trading high (green line). The stock is in a long term up trend (straight blue lines) as well as an intermediate/short term up trend (purple lines). The wiggly blue lines are Bollinger Bands. The Dividend Growth Portfolio owns a full position in SHW. Shares would be Added at $70; the lower boundary of its Sell Half Range is $118. So while we think very highly of the company, its stock is on the edge of being dramatically overvalued. Any move above $118 and our Dividend Growth Portfolio will Sell Half of its position.

(Click to enlarge)

Disclosure: I am long SHW.