So there’s been a few companies where it took me a while to figure out, “Holy cow, this company is a printing press. It has a license to print money and is growing fast.” These come-to-growth moments have been loosely as follows: I came to appreciate Disney in 2013, Visa in 2014, Nike in 2015, and now, in 2016, Sherwin-Williams has really been the business that has come onto my radar after years of neglect.
The stock rarely goes on sale, and I imagine that many people buying it outside of the 2008-2009 period felt like they were paying a higher price than they’re comfortable with. But Sherwin-Williams has such an extended record of growing earnings quickly that the seemingly high price of the moment becomes a pined-for entry point in short order.
These are the total return data points:
Since 1985, Sherwin-Williams (SHW) stock has returned 16.3% per year.
Since 1990, 15.9% per year.
Since 1995, 16.3% per year.
Since 2000, 19.7% per year.
Since 2005, 20.1% per year.
Since 2010, 29.0% per year.
The current P/E ratio at Sherwin Williams, which is in the low 20s, might make the stock look more expensive than an accurate assessment of the earnings power might suggest. Just as the strength of the U.S. dollar in recent years has obscured the business performance of many U.S. multinationals, merger activity that will lead to rapid increases in earnings per share can make a stock’s P/E ratio look expensive before the deal is fully consummated.
Together with Valspar, the earnings power of Sherwin-Williams ought to increase from the current $12.50 per share to somewhere around $14.50 per share. The $291 share price, which might seem a bit on the unreasonable side if you look at the $12.50 in current earnings and see a stated P/E ratio of 23.8, sits squarely in that zone of reasonableness at 20x earnings if you adjust for the share dilution and acquisition costs of Valspar and then size up the combined earnings power.
You know what else is interesting? Among the major financial sites, be it CNBC or Seeking Alpha, you end up seeing hardly any attention given to Sherwin-Williams at all. It gets the procedural treatment–earnings are noted, dividend payments are stated, and M&A activity gets a passing headline. But beyond that, there is very little discussion of Sherwin-Williams as a long-term investment.
That is a mistake. The media fixation on Netflix, Apple, Facebook, and Amazon, whose businesses have admittedly created monstrous amounts of wealth for shareholders that have been around for 5+ years, feed into the “stocks are gambling instruments” mentality because there is no real predictability about what those businesses will look like five years from now.
Paint, on the other hand, is the definition of boring and predictable. But this is an example of where boring, repeatable profits coming in and in, over and over again, creates an ideal formula for wealth.
The more I study the excellent profit margins, exemplary long-term record of growth, strong balance sheet, and intuitive appeal of a strong business that is resistant to technological change, the more I conclude that I made a terrible mistake leaving Sherwin-Williams off of my Master List of Stocks tab on the homepage. Adjusted for earnings quality, it is probably one of the top 75 businesses in the world; adjusted for earnings quality and growth potential, it slides into the top 40.
It’s funny that people looking to get rich quick always look to the homerun-or-strikeout tech sector as the place to radically improve their household balance sheet. No one would intuitively rush to a large-cap paint company, and yet, you only needed to come up with $58,000 sixteen years ago to have over a million dollar’s worth of Sherwin-Williams stock today. Tens of thousands of dollars, compounding over a decade and a half, grew to over a million.
My only lament is that, like with Disney, Visa, and Nike, I experience my revelation years into a bull market. Over a 10+ year time frame, paying the upper end of fair value won’t matter much. Over a five year time frame, I’m less clear. But I am clear that Sherwin-Williams is an “inevitable” stock which probably ought to work its way into every individual investor’s portfolio at some point.
Originally posted 2016-05-24 22:33:18.