Streetwise for Sunday, February 4, 2018

It is unfortunate that achieving professional success, and its subsequent rewards, does not bestow a comparable level of investment expertise. Alas, neither does eligibility for Social Security. To the detriment of the gullible, enviable returns are offered up by pseudo experts with a supposedly elite understanding of market trends and psychology.

It is no real surprise that the promised returns are rarely, if ever, forthcoming. Yet a cornucopia of quality investments is readily available to virtually everyone. A good example is Sherwin-Williams (SHW), the nation’s largest paint manufacturer, known for its slogan, “It Covers the World.”

Founded in 1866, Sherwin-Williams is a global leader in the manufacture, development, distribution, and sale of coatings and related products to professional, industrial, commercial, and retail customers. The company manufactures products under well-known brands such as Sherwin-Williams, Dutch Boy, Krylon, Minwax, Thompson’s Water Seal, and many more.

Sherwin-Williams’ branded products are sold through more than 4,000 company-operated stores, along with leading mass merchandisers. The Sherwin-Williams Global Finishes Group distributes a wide range of products in more than 109 countries.

When I last wrote about the company a year ago, my earnings estimate for 2017 was $13.00 per share, with a 12-month target price of $333, for a capital gain of about 10 percent. So how did the company do? Earnings were $15.07 per share and the shares recently closed at $417.11.

The Americas Group unit registered net sales of $2.19 billion in the fourth quarter, up around 9 percent on a year over year basis. Revenues were driven by increased architectural paint sales. 

Net sales of the Consumer Brands Group unit were up 89 percent to $571.6 million in the fourth quarter. Valspar sales increased that division’s net sales by about 96 percent for the quarter.

The Performance Coatings Group’s net sales increased 160 percent to $1.22 billion in the quarter, of which Valspar accounted for about 152 percent of that increase.

Overall, sales in the fourth quarter increased 43.0 percent to a record $3.98 billion. For the year they increased 26.4 percent to a record $14.98 billion.

Valspar sales since the month of June increased consolidated net sales for the quarter and the year by 36.1 percent and 20.8 percent respectively.

Same store sales, meaning stores that are open for more than a year, increased 8.2 percent in the quarter and 6.3 percent for the year.

Full year earnings from continuing operations, reached a record $2.28 billion. Full year net operating cash increased $575.4 million to $1.88 billion.

Sherwin-Williams expects to see earnings per share for 2018 in the range of $15.35 to $15.85 per share, including a charge of approximately $3.45 per share for acquisition-related costs related to Valspar.

At the close of 2017, Sherwin-Williams had $204.2 million cash in hand, which it plans to use to fund operations and reduce debt.

Looking ahead into 2018, the company is projecting mid-to-high single digit percentage increase in net sales year over year for first-quarter 2018. It also sees incremental sales from the Valspar acquisition to be roughly $1 billion in the first quarter.

The company’s guidance going forward is for a mid-to-high single digit percentage increase in net sales when compared to 2017. Earnings per share for the same period are expected to be in the range of $15.35 to $15.85. The guidance includes around a $3.45 per share charge related to the Valspar acquisition.

The intrinsic value of the shares using a conservative free cash flow to the firm methodology yields an intrinsic value of $882 per share.

My earnings estimate for 2018 is $17.00 per share, with a 12-month target price of $465, for a capital gain of about 10 percent. In addition, there is an indicated dividend of $3.40 or 0.80 percent. Of note, the company has been increasing dividends for 36 consecutive years.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.