Sherwin-Williams: Becoming More Overpriced With Each Passing Day

| About: The Sherwin-Williams (SHW)
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Summary

The company’s shares have surged upward in the last several years to all time highs and insiders continue to sell large amounts of shares.

The company’s shares have been surging by multiple points on a daily basis pushing the company’s price to earnings ratio far above the historic price to earnings ratio.

Much of SHW’s sales are derived from the slow-growing North American market where many purchasing decisions are based on discounting rather than brand loyalty.

The company benefits from the recovery in the U.S. housing market, but also suffers when the housing market turns downward.

When market commentators indicate that overall U.S. stock markets are in a bubble, we tend to disagree as we see quite a number of stocks of companies at 52-week lows struggling to revitalize revenue and earnings growth. There are companies, however, where we agree with commentators regarding a bubble. Sherwin-Williams (NYSE:SHW) is one of those companies in a bubble that is expanding on an almost daily basis. We find it hard to believe we were able to buy the company's shares at about $46 a share just several short years ago and which we sold (much too early) at $155 in late 2012. SHW is a well-run company that is executing their objectives well. The company has a strong and proven track record of posting solid earnings, strong revenue growth and dividend increases. That said, SHW's has risen far above the value of such performance. The share price has sharply increased over the last several years, but now the current share price is near all-time highs and insiders are selling significant amounts of shares. We would not recommend buying SHW shares unless a 20 to 30 percent pullback in the share price occurred first. Let us look briefly at the company and their recent earnings announcement.

Background

Sherwin-Williams develops, manufactures, distributes and sells paints, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in select areas around the world. The company is divided into four divisions: paint stores, consumer, global finishes and Latin America coatings. The paint stores division, representing 59 percent of 2013 sales, offers Sherwin-Williams branded architectural and industrial paints, stains and related products. The consumer division, representing 13 percent of 2013 sales, develops, manufactures and distributes architectural paints, stains and more. The global finishes division, representing 20 percent of 2013 sales, develops, licenses, manufactures, distributes and sells paints, stains, coatings, varnishes, industrial products and more for the automotive, aviation, fleet and heavy truck markets. The Latin America coatings segment, representing 8 percent of 2013 sales, develops, licenses, manufactures, distributes and sells a wide range of architectural paints, industrial coatings and related products throughout Latin America.

Third Quarter 2014 Earnings

In late October 2014, SHW announced that earnings increased 31.4 percent to a record $3.35 per share in the third quarter from $2.55 per share earned in the year-ago quarter. The company's results resulted from improved operating results in their paint stores, global finishes and consumer groups.
SHW recorded net sales of around $3.15 billion in sales in the quarter, a 10.6 percent increase from the year ago quarter. Increased paint sales volumes in the company's paint stores group and the favorable impact of acquisitions led to higher sales in the quarter.

The paint stores group recorded net sales of $2.03 billion in the quarter, an increase of 15 percent from the year-ago quarter. Net sales for the consumer group increased 5 percent to $385.2 million due to acquisitions and higher volume sales to most of the company's retail customers. Net sales from the global finishes group increased 5.7 percent to $536.3 million due to higher selling prices and higher paint sales volumes. The Latin America coatings group's net sales decreased 4 percent to $200.4 million as higher selling prices were offset by unfavorable currency translation.
SHW bought back 2 million shares through open market purchases in the quarter.

SHW increased their earnings guidance for 2014 to a range of $8.70 to $8.80 per share from $8.50-$8.70 per share, expected previously. For the fourth quarter of 2014, SHW expects consolidated net sales to rise 6 percent to 8 percent from the year-ago quarter. The company expects earnings per share in the range of $1.30 to $1.40 per share.

Our view

Our view is that SHW is an excellent, well-run company that is currently overpriced and getting more overpriced by the day. The company's shares have had an extraordinary run over the last several years and seem to rise on an almost daily basis by multiple poinrs. The 2015 earnings estimate is $10.86. The forward price to earnings ratio based on such estimate is 22.60, which is far above the company's historical average of 15. We would like to see the share price pull back to $185 to $195 (which is a forward price to earnings ratio of 17 to 18) before any investor even considers starting a position in SHW shares. That said, future estimates are just that, estimates. Even the slightest stumble by SHW or the U.S. economy at this point will bring SHW shares back to their historical price to earnings ratio and the shares would likely drop 30 to 40 percent from their highs. We recommend against buying the company's shares now as the shares are becoming more expensive on a daily basis hitting all-time highs multiple times, insiders are selling millions of dollars of shares and the shares are priced to perfection.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.