Sherwin Williams: Another Solid Year, Laughingly Undervalued

In a recent interview, Sherwin Williams (SHW) CEO Christopher Connor reassured shareholders that despite the US housing situation, his company would post another solid year.

Highlights:

• For 2007, the company expects to earn $4.70 to $4.75 a share, a more than 12% increase from 2006 earnings of $4.19 a share.

• Expects double digit EPS growth in 2008.

• Management will recommend a dividend increase for 2008 to the area of $1.40 to $1.42 a share for a 2.5% yield at current prices.

• 2008 inventories will be below year-ago levels despite the housing slowdown.

• The Global Group had strong sales and earnings gains in 2007 and the prospects for 2008 are good.

• The Paint Stores Group: Will produce about 62% of the company's sales in 2007. A net of about 100 stores were opened in 2007 and an additional 170 were acquired through acquisitions. Sherwin will end the year with more than 3,300 stores, an 8% increase from 2006.

• Through Q3, the company repurchased 10.2 million shares for about $650 million.

There were two key takeaways. One for the market, and one for shareholders. for the market, Connor said that while there is still some effect of the housing situation for Sherwin and while tighter credit may make it more difficult for homeowners to finance major home remodeling, "a few gallons of paint is the cheapest and most dramatic change in a family's living environment." While folks may not do a major remodel, that will slap a fresh coat of pain on a room to change it.

The markets seem to be missing this point as Sherwin now trades at 12 times 2007 earnings and 10 times next years anticipated. Can anyone name another company out there growing EPS at double digit rates, acquiring other businesses, increasing the dividend and buying back stock WITHOUT adding more debt that is seeing its multiple slashed? Me either. Sherwin is becoming laughingly undervalued...

For shareholders Connor added this tidbit when he said the company has spent $248 million of that cash to acquire six companies and "there could be another acquisition before year-end."

That seems to have gone unnoticed by everyone out there. Sherwin is able to use the weakness in its industry now to increase its footprint in it at very attractive prices. That, is very good news...

Oh yeah, lead paint? Done....

Disclosure: Author is long SHW.

Comments

[dtv999]

What about the potential lead paint liability? No one knows who big that might be.

[firboy4]

I don't think American paint companies have lead in their paint since many years ago, like around '76 or so.

[User 137532]

I'm a former SW employee. They voluntarily took the lead out of their paint before law mandated they do. I don't think any court can find liability.

[todd su]

the lead paint thin is all but done. cases are being thrown out left and right...

[SW Emp]

Your correct about the voluntary action took by the company, it was not fed mandated until 1978. They have been 11 cases related to this, 10 have been thrown out, and the 11th is still in the courts. Hope to God when this nonsense is over, stk rises?