Painting by numbers is not child’s play in the case of Sherwin-Williams. The figures are equivocal for the US paint company. Is it a speciality chemical maker or a vertically integrated building supplies company? The distinction makes a big difference to how the shares are valued.
Increasingly Sherwin sells paint direct to contractors via its own high-margin paint stores and less through DIY retailers such as Home Depot. The proportion has risen steadily from two-fifths in 1980 to almost three-fifths today. Contractors want professional advice when they buy and they get it in the stores. So while Sherwin trades at a premium to speciality chemicals companies, it is in line with home improvement retailers and at a discount to makers of building supplies.
Moreover, Sherwin and its main rival PPG control a third of the architectural coatings market in North America. No surprise, then, that the company’s return on equity is more than 40 per cent and rising – higher than during the housing boom. Can Sherwin maintain these high returns?
One possibility: buy some growth. Sherwin wants to expand in Latin America via Comex, the leading Mexican paint maker. But regulators there are wary. They fear that a combined company would dominate the market and have blocked the deal. Sherwin has already raised the funds for the acquisition. However, if it must surrender on Comex, it can return that cash to shareholders via buybacks. Shrinking equity can lift returns and boost the share price.
Between 2008 and 2012 Sherwin returned nearly three-quarters of available cash flow to shareholders via buybacks and dividends. The run rate for 2013 has been similar. Without Comex, even more buybacks should follow. All this paints a rosy picture for the shares.
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