Sherwin Williams: A Great Value Play

With the whole retail landscape like Home Depot (HD), Target (TGT), Lowes (LOW) and others reducing estimates and facing trouble, Sherwin Williams (SHW) just keeps increasing sales and earnings. Sherwin, far from reducing estimates is looking at 13% EPS growth for 2007.

First, the results:

• Net sales increased to $2.20 billion in the quarter and $6.15 billion in nine months

• Diluted earnings per share increased to $1.55 in the quarter and $3.88 in nine months

• Opened 76 new stores in nine months: 59 in Paint Stores Group, 17 in Global Group

• Completed four acquisitions during the quarter including Columbia Paint & Coatings Co.

• Raising guidance for full year diluted net income per share to between $4.70 to $4.75 per share

• Four acquisitions completed in the third quarter, including Columbia Paint & Coatings Co. completed at the end of the quarter, and two acquisitions completed during the second quarter, including M. A. Bruder & Sons Incorporated, increased consolidated sales by 2.0% in the quarter and by 1.0% in nine months. Acquisition costs reduced EPS by $.02

• The Company acquired 5,550,000 shares of its common stock through open market purchases during the quarter at an average price of $67 a share.

Here are the numbers that ultimately matter. Diluted net income per common share increased 19.2% in Q3 to $1.55 per share from $1.30 per share in 2006 and 12.1% in nine months to $3.88 per share from $3.46 per share last year. Now Sherwin also raised full year guidance and based on history. Not only can investors count on that number, but expect them to come in ahead of it.

Shares sport a near 2% dividend and trade at a paltry PE of 15, which is lower than the S&P average of 16.7 despite growing earnings almost twice as much this year. Add to this the recent 30 million share repurchase plan that represents 23% of the outstanding shares, and you got the perfect conditions for appreciation. More insight was given into the repurchase plan on the call. Sherwin has been repurchasing about 10 million a year based on previous repurchase plans so expect about 10 million to be bought in 2008 and that alone will boost EPS 8% next year.

CEO Christopher Connor said:

We are pleased that all our operating segments continue to achieve segment profit growth on a year-over-year basis. Our Consumer Group management continues to drive efficiencies that have helped to partially offset that Group’s sales reductions. Consolidated gross margins continue to improve as our operating segment teams strive to return our gross margins to more normal run rates after being pressured by the significant rise in raw material costs over the past three years. We expect the businesses and product lines acquired during 2007 to contribute to our sales and profit goals in the future.

Back in July I said that the expansion, both globally and in the domestic paint store segment, was going to enable Sherwin to brush off the US housing market. So the question now has to be, how did these segments do? The Global Group’s segment profit improved $5.3 million, or 12.4%, to $48.0 million in the quarter and $23.1 million, or 21.1%, to $132.3 million in nine months. Global Group's EPS is expected to grow at "high single to low double digits for the foreseeable future." Paint Stores Group segment profit increased $21.7 million, or 9.6%, to $248.4 million in the quarter and $51.7 million, or 9.3%, to $608.9 million in nine months. Case closed.

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Sherwin is firing on all cylinders in a challenging US environment and is selling at a discount to the market despite growing much faster than it. When housing turns (it will) Sherwin's earnings will jump much faster than the 13% they are now. Currently Sherwin is a great Value play.