Sherwin Williams: This COVID-Proof Powerhouse Is Breaking Out

Introduction

In a volatile market environment it's getting increasingly difficult to find stocks that are hitting new all-time highs, exhibit below-average volatility and operate a COVID-proof business. One of those few names is Sherwin Williams (SHW), the Cleveland-based paint and coating giant, which has now increased its revenue and cash flow guidance for several times throughout 2020. While the stock seems richly valued at 30 times FY2021 earnings, there are several reasons to own this name.

Sherwin Williams' Track Record Speaks for Itself

Being a dividend aristocrat and well underway to earn the King status within a couple of years, Sherwin Williams boasts a track record of consistency, stable margins and high cash flow growth.

(Source: Investor Presentation)

Standing at roughly $530 million in 2005, the company's recurring free cash flow before changes in working capital requirements has nearly quadrupled over the past 15 years. Adding the explosive effect of share buybacks on the outstanding share count (from 141 million to 92 million shares in 2019) to equation, free cash flow thus went up from $3.75 to $23 or a cumulative increase of 513%. That not only underpins its excellent management team, smart capital allocation decisions and high ROI (22.7% as of Q3 2020) profile, but it does show the power of compounding and sitting tight when it comes to owning shares of great businesses.

Sherwin Williams' Rightfully Earned The COVID-Proof Label

As lockdown measures came into effect during March, analysts quickly trimmed their EPS expectations for both fiscal 2020 and 2021. However, buoyed by booming Consumer Brands as a result of DYI activity, Q2 turned the tide pretty fast. Following the Q2 earnings call, management raised its full-year guidance twice.

(Source: Marketscreener)

Furthermore, for Q3 it reported a 5.2% increase in 3Q20 sales year-over-year and a quarterly improvement of 11%. This performance puts it solidly far ahead of industry peers such as PPG, AkzoNobel. Consumer Brands contributed very positively to the top line, delivering 23% growth in Q3 and most importantly, the aftermath of continued unprecedented growth in DYI renovating/painting will remain very favorable to FY2021 results. Additionally, keep in mind that Consumer Brands made up only 15% of total revenues in 2019. Adjusted EPS grew 24.7% in Q3, positively impacted by lower raw material prices.

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