Sherwin Williams: Paint The Town Red

| About: The Sherwin-Williams (SHW)

Since its founding by Henry Sherwin and Edward Williams in 1866, The Sherwin-Williams Company (NYSE:SHW) has not only grown to be the largest producer of paints and coatings in the United States, but is among the largest producers in the world. The Sherwin-Williams' brand is the leading brand of architectural paint used in the United States today.

Complimenting that and assisting sales through external distribution are interior stains and sealants of the other leading brand names like Dutch Boy, Martin- Senour, Pratt & Lambert, Minwax, exterior water sealers and wood protectors of the other leading brands Thompson's and aerosols of other leading brand names like Krylon .


In the "I bet you did not know this" category, they operate 2,600 paint and automotive coatings stores in the Western Hemisphere. They are the number one vehicle used to get a majority of products to market, as there are over 2,400 paint and automotive coatings stores in the United States alone. Their coatings are also used heavily in the marine and aerospace industries.

In short, there isn't anything not to like about SHW. They are expanding operations as witnessed on Monday when they announced they are buying 100-percent of the stock of M.A. Bruder & Sons, headquartered in Philadelphia, PA. Bruder, with sales of about $146 million through 132 stores, is a leading manufacturer and distributor of paints and coatings in the Eastern and Southeastern U.S. Its niche is primarily the professional contractor market, one which SHW has been aggressively entering the last several years.

Sherwin-Williams' Chief Executive Officer Christopher Connor sees both companies benefiting from the synergies of increased retail space and manufacturing capacity.

In the March 26th issue of BUSINESS WEEK, SHW was saluted as one of the top performers in business and reported that in 2006 Sherwin-Williams earned record profits of $576 on $7.8 billion in sales. The company "has been good to shareholders" by paying out 30 percent of earnings in rising dividends for 28 consecutive years and CEO Connor predicts another record year, despite the housing slowdown (meaning another dividend increase). Sherwin-Williams has ramped up sales in the nonresidential market and in automotive paints in Latin America that are more than offsetting any U.S. residential weakness.

Let's get the easy stuff out of the way and look at the financials.

The following are 10-year numbers:

Dividends Per Common ShareDiluted Income Per Share

Consolidated Sales

Again nothing not to like. A history of consistent, increasing earnings, sales and dividends and this year's forecast is for another record year.

So, why aren't people rushing to invest in SHW? Two reasons:

1- They falsely assume SHW is tied directly to the U.S. housing market

Lead Paint Litigation: Baseless

While constantly being compared with respect to legality, tobacco and asbestos litigation are vastly different from lead paint. Tobacco and asbestos, when used properly for their intended purposes, produce the deadly results the litigations stemmed from. Lead paint, when used and maintained properly, is harmless. It is much like bleach. When used properly, bleach is beneficial and safe; when not taken care of and ingested, fatal. Are we going to start suing Clorox [CLX] (NYSE:CLX)? Also, lead paint is no longer being produced.

One rather important point that also needs to be considered: there's no evidence. The lead paint in house "X" cannot be traced back to a specific manufacturer. Sherwin-Williams stopped using lead pigment in residential interior paint in 1947 before the federal ban in 1978. Furthermore, commercial painters added additional lead to paint to improve its performance before it was outlawed, and there is evidence that many continued well after that. This means there is no scientific way to prove that what is on the walls in house "X" is from Sherwin-Williams' lines of paint. For a great history of why lead paint was even used in the first place, please visit this site.

Based what's going on in Rhode Island, both Sherwin-Williams and NL Industries (NYSE:NL) who filed an appeal last Friday with the RI Supreme Court are not going to accept the February 22, 2006 verdict or settle at some point in later proceedings. If they don't obtain the decision they want from the RI Supreme Supreme Court, they will go the distance - to federal court. The constitutional grounds for doing that were carefully argued in the original trial and in the post-verdict motions.

I will go on record and say that eventually the RI Supreme Court will side with the verdict in the only case in which the "public nuisance" theory has made its way through the court system to final resolution - in a case filed by the City of Chicago. There, the Illinois Appellate Court unanimously upheld dismissal of the public nuisance claim. The Illinois Supreme Court denied review of the appellate decision, which said: “We therefore hold that the conduct of defendants in promoting and lawfully selling lead-containing pigments decades ago, which was subsequently lawfully used by others, cannot be a legal cause of plaintiff’s complained-of injury, where the hazard only exists because Chicago landowners continue to violate laws that require them to remove deteriorated paint." For more details of other lead paint case dismissals, visit here.

What are these suits really about? Helping victims or aiding municipal budget shortfalls? Consider that Ohio Governor Ted Strickland recently announced that he is going to opt for a lump-sum payment of $5 billion in the tobacco settlement to help fill his budget deficit. The state would have received a larger total sum if it had received payments over an extended period of time, but states cannot control their budgets and now that Strickland has sapped the tobacco money he must find new revenue: enter lead paint litigation.

Perhaps that's exactly what the six cities in OH were thinking about when they decided to sue the former lead paint companies, including the local Sherwin-Williams. A lot of money came in from tobacco, so they assume, in a matter of time plenty will come in from lead paint, either through settlement or court trials.

There are plenty of very legitimate reasons that people causing others harm should be sued and made to pay for their actions. Lawsuits like these lead paint cases diminish the validity of those claims by tarnishing the whole system. It is further reprehensible for state and local governments to jump on this bandwagon because they lack the ability and guts to manage their own finances. Rather than deal honestly with their constituents, they seek to hide their incompetence by essentially extorting money from legitimate businesses and their shareholders.
In one fell swoop they harm shareholders, pension plans, employees of these companies and consumers who will pay more for these products should they prevail.

Worst of all, they harm the very people who most desperately need our judicial system, those who are injured by the true negligence of others and would lose everything they had worked so hard for were it not for the very system these localities now seek to exploit. This scenario encompasses the vast majority of injury cases, but the publicity these insipid lead cases will get causes all injury litigation to get lumped together - guilt by association.

Their very real injuries and very legitimate claims then become trivialized in a society that seeks to group people together for comparison. When the most pervasive public view is of people bellying up to the trough because they or their landlord did not follow the law and remove lead paint before they let their child gnaw unsupervised on a windowsill, true victims suffer. Aside from the obvious court clogging results of this litigation, the very real victims out there then have unwarranted skepticism cast on their plights. It will be up to Ohio and Rhode Island voters to ask hard questions of those responsible such as, "why they spent millions of dollars and hundreds hours of prosecutor's time on cases they were destined to lose?"

Here is to hoping that they do....

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