Sherwin-Williams Company (SHW): Great Stock, Great Company, Great Evaluation?

Why I’m Not so Sure

Firstly, as noted above the evaluation of SHW does leave investors exposed to significant risk of any kind of change in sentiment on housing. Similarly, recall that its expansion plans are predicated on an improvement in US housing. I think it makes sense and I’m bullish on housing, but an investor needs to understand the risk/reward calculation. There is a long way down with SHW if I’m wrong about US housing and I could be.

Second, PPG Industries has much of a focus on global industrial production, so its development of Akzo Nobel’s former US household paint division will be somewhat affected by activities elsewhere. It’s a similar story with another rival The Valspar Corporation (NYSE:VAL). The latter found it tough going in some of its international markets in 2012 but described Q4 volumes in its North America home improvement channel to be up low single digits with particular strength in retail.

Both PPG and Valspar are somewhat dependent on China, PPG on the industrial side (particularly automotive) and Valspar with housing.  My point is that any disappointments there could cause them to try to offset any earnings shortfall by being more competitive in the US. There is always a risk in assuming that market conditions will remain the same, and PPG is expanding into US housing so we can expect some increased competition here. By way of comparison PPG and VAL trade on nearly 22x earnings as opposed to SHW’s 25x.

Third, input costs for things like titanium and propylene are always subject to uncertainty.

Finally, with regards to pricing SHW regards itself as an ‘input cost pricer’ to the marketplace. I suspect most companies would want to be seen as this to a certain degree  but it is the type of language used by corporations that are more in the ‘commodity’ type of pricing environment. In other words, they will lose market share if they increase pricing too much. Therefore, assuming any upside with pricing in 2013 for SHW is not advisable. Indeed, I got the sense the company was suggesting this on the conference call.

Where Next for Sherwin Williams?

The evaluation looks high enough for me, and as much as I like US housing there are probably other companies out there with a better risk/reward algorithm than SHW right now. The market has shifted from seeing the glass half empty to assuming that there is a free refill on tap.  As much as I like the stock, I am a fundamentals based investor and am willing to take a pass here when momentum based investors would just buy the stock. It’s boring I know, but I’m investing my own money here.

The article Great Stock, Great Company, Great Evaluation? originally appeared on Fool.com and is written by Lee Samaha.

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