In 2015, the company enjoyed broad-based growth across its business segments. Net sales increased by (all in constant currency numbers):
– 5.2% in the Paint Stores Group
– 11% in the Consumer Group
– 1.1% in the Latin America Coatings Group
– 0.4% decline in the The Global Finishes Group
Sherwin-Williams Co (NYSE:SHW) is benefiting from an improving U.S. consumer, which is due to a steady economic recovery, and a solid housing market.
These tailwinds have helped it to start 2016 as well. Last quarter, net sales increased 2.8% and reached a record $3.22 billion. Diluted earnings-per-share increased 7.8% and also hit a record.
Growth Prospects
Sherwin-Williams has a management team that is very effective at producing long-term growth for the company. In 2006, the company had earnings-per-share of $4.19; earnings-per-share clocked in at $11.16 last year.
That comes out to a 10% compound annual growth rate over the last decade, which is a very strong performance given that period of time encompassed the Great Recession.
Going forward, Sherwin-Williams’ main growth drivers will be expansion in Asia and the Middle East, which is home to many attractive emerging markets such as China and India.
These markets are very appealing to Sherwin-Williams because they have populations in excess of 1 billion and rising middle classes. This bodes well for a consumer products company. This was one of the main reasons why Sherwin-Williams acquired Valspar (2) in 2016 for $11.3 billion—The Valspar Corp (NYSE:VAL) has a significant international footprint.
Another growth catalyst the acquisition opens up is in the U.S. market. The Valspar acquisition will help Sherwin-Williams capitalize on the shift from do-it-yourself to contractor services.
For decades, the U.S. consumer has gradually gone away from doing home repairs themselves, to hiring outside help. With Valspar in tow, Sherwin-Williams believes it has an optimal customer mix.
Source: 2016 Financial Community Presentation, slide 7
The consolidation of the paint industry will continue to lead to rising margins. From 2006 to 2015 the company’s net profit margin grew from 7.4% to 9.3%. Synergies from the Valspar acquisition should help to boost margins further over time.
Sherwin-Williams does not pay a particularly high dividend. The company has a 1.2% dividend yield and 25% payout ratio. But, Sherwin-Williams regularly repurchases shares. Net share count has declined by 3.7% a year over the last decade. Continued share repurchases will also drive growth, in addition to margin expansion and organic growth.
I believe Sherwin-Williams can continue to compound its earnings-per-share at between 8% and 12% a year over full economic cycles. Earnings will likely decline during recessions (discussed in the next section of this article), but growth will be strong during times of economic prosperity.
