Here’s What To Do About Sherwin-Williams Co (SHW)’s Acquisition of The Valspar Corp (VAL)

Did Sherwin-Williams Overpay?

The coatings industry is cyclical.  There are two primary factors that impact earnings for the coatings industry:

1. The strength of the global economy (especially housing and construction)

2. The price of oil

When the global economy is strong, the coatings industry tends to do well. Sherwin-Williams has compounded its earnings-per-share at 20% a year since the worst of the Great Recession in 2009.

But the company did see earnings-per-share decline 20% from 2007 to 2009 during the Great Recession. Sherwin-Williams remains profitable during recessions, but the company is far from recession resistant. The same is true of much of the coatings industry.

Oil prices also effect profitability for the coatings industry. Oil is one of the primary input costs of most coatings.  High oil prices reduce margins, while low oil prices increase margins. Ultra-low oil prices have been a powerful tailwind for Sherwin-Williams.

What does all of this mean for the Valspar acquisition?

It means Sherwin-Williams is buying Valspar when everything is going just right. As a result, the company is paying far more than it would if it waited to purchase Valspar during a recession or a period of high oil prices (or preferably, both).

With that said, Sherwin-William is purchasing Valspar for a price-to-earnings ratio of around 20. Sherwin-Williams itself trades for a price-to-earnings ratio of nearly 26.

The acquisition is not timed well. It is also being done for a fairly reasonable price-to-earnings ratio. Sherwin-Williams is not drastically overpaying for Valspar.

What Should Shareholders Do?

Shareholders of Sherwin-Williams Co (NYSE:SHW) should continue to hold this high quality dividend growth stock.  There’s no reason to bail on Sherwin-Williams. The company will very likely be larger a decade from now than it is today. The company will very likely also continue to pay rising dividends.

Investors looking to get exposure to the coatings industry would likely be better served waiting to make a purchase until either (or both):

1. Oil prices rise

2. The United States housing and construction market slows significantly

These events will create a more favorable time to purchase shares of Sherwin-Williams.  Sherwin-Williams currently does not rank particularly well using The 8 Rules of Dividend Investing due to its above-average price-to-earnings ratio and low dividend yield.

Valspar shareholders are likely dancing in the streets due to the large premium the company is being acquired for.  They are the biggest benefactors of the announced deal.

Disclosure: None