Sherwin-Williams Company - A Fair Value Report

My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
The Sherwin-Williams Company is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers in North and South America, the Caribbean region, Europe and Asia. Industry peers include PPG Industries, Inc. (NYSE: PPG), The Valspar Corporation (NYSE: VAL).

Recent Business Acquisitions
During 2019, the company completed the acquisition of a domestic packaging company and two European coatings companies for an aggregate purchase price of $84.4 million, including amounts withheld as security for certain representations, warranties and obligations of the sellers.

Recent Business Divestitures
There were no business divestitures or dispositions during fiscal 2019.

Subsequent Events
There were no subsequent events between the company’s fiscal year end and the filing of its most recent 10-K.

Short-Term Target
My current short-term target for the stock is $556.15, with an initial trailing stop set at $545.16. With a recent price of $553.46, upward price movement will find resistance at $576.66, and again at $594.48, with final resistance found at $599. Downward price movement will find support at $525.99 and again at $488.59, with final support found at $466.60.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. Basis my current beta ratio for this stock of 1.04, my volatility discount to recent pricing is $21 per share, making my the volitility adjusted price $532.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $0.20 per share came from sources unrelated to day to day operations and/or from income tax benefits.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 61.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 38 shares of stock with a cost basis of $263.04 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $578.74 per share. During that holding period you would have collected $133 in regular and special dividends, and your initial $10K investment would have returned to you $22,002 a gain of 120% excluding regular and special dividends.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 4.50%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 96 insider trades involving 225,230 shares of stock. Of those 96 insider trades, 54 were Buys involving 119,715 shares of stock, and 42 were Sells involving 105,515 shares of stock, creating an insider buy to sell ratio of 1.1 to 1..

Prior Average Valuations
My average valuation for the prior five year fiscal period was $77. The stock price during that time period averaged $319, earnings averaged $14.27 per share, and the average PE Ratio was 22. The current PE Ratio is 26.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $665 and my equity value (market cap plus cash less debt) is $442, making my E2E Ratio, 0.67.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 25%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is (4).

Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $262. My worksheet target prices are derivatives of my fair value estimate.

The Sherwin-Williams Company, Inc. (NYSE: SHW) – FYE 12/2019 – OVER VALUED – The stock is currently trading at levels above my most recent $419 terminate target. Please See Linked PDF Worksheet

There you are, short and, hopefully, to the point.

Wax
Revised on 05/13/2020