Is Sherwin-Williams a speciality chemical maker or a vertically integrated building supplies company? The distinction makes a big difference to how the shares are valued

January 22, 2014 Leave a comment

January 20, 2014 4:06 pm

Sherwin-Williams: rosy picture

If US paint company must give up acquisition plan, that looks like good news for shareholders

Painting by numbers is not child’s play in the case of Sherwin-Williams. The figures are equivocal for the US paint company. Is it a speciality chemical maker or a vertically integrated building supplies company? The distinction makes a big difference to how the shares are valued.Increasingly Sherwin sells paint direct to contractors via its own high-margin paint stores and less through DIY retailers such as Home Depot. The proportion has risen steadily from two-fifths in 1980 to almost three-fifths today. Contractors want professional advice when they buy and they get it in the stores. So while Sherwin trades at a premium to speciality chemicals companies, it is in line with home improvement retailers and at a discount to makers of building supplies.

Moreover, Sherwin and its main rival PPG control a third of the architectural coatings market in North America. No surprise, then, that the company’s return on equity is more than 40 per cent and rising – higher than during the housing boom. Can Sherwin maintain these high returns?

One possibility: buy some growth. Sherwin wants toexpand in Latin America via Comex, the leading Mexican paint maker. But regulators there are wary. They fear that a combined company would dominate the market and have blocked the deal. Sherwin has already raised the funds for the acquisition. However, if it must surrender on Comex, it can return that cash to shareholders via buybacks. Shrinking equity can lift returns and boost the share price.

Between 2008 and 2012 Sherwin returned nearly three-quarters of available cash flow to shareholders via buybacks and dividends. The run rate for 2013 has been similar. Without Comex, even more buybacks should follow. All this paints a rosy picture for the shares.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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