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Growth & Income

Estimates have been rising for The Sherwin-Williams Company (SHW - Analyst Report) after it delivered better than expected third quarter results despite a difficult environment. It is a Zacks #2 Rank (Buy).

The paint company is well positioned to benefit from an improving housing market, and analysts expect strong double-digit EPS growth over the next few years.

Moreover, management is very shareholder-friendly and has increased its dividend every year since 1979. It currently yields 1.6%.

Company Description

Sherwin-Williams develops, manufactures and distributes paints and coatings to a wide range of customers around the globe. It reports its operations in 3 segments: Paint Stores Group, Consumer Group, and Global Finishes Group.

It was founded in 1866 and is headquartered in Cleveland.

Third Quarter Results

Sherwin-Williams reported better than expected results for the third quarter of 2011. Earnings per share came in at $1.71, beating the Zacks Consensus Estimate by a penny. It was a 7% increase over the same quarter in 2010.

Net sales rose 14% to $2.485 billion, ahead of the Zacks Consensus Estimate of $2.423 billion. The increase was due to higher selling prices, acquisitions and strong organic growth from the Global Finishes Group. Same-store sales in the Paint Stores Group were up a solid 8.2%.

The gross profit margin fell from 44.7% to 41.8% of net sales, however, due to continuing raw material cost increases. But selling, general and administrative expenses fell from 32.4% to 30.6% of net sales as the company leveraged its fixed expenses.


Analysts increased their estimates for both 2011 and 2012 following the solid third quarter. This sent the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2011 is now $4.84, representing 9% growth over 2010 EPS. The 2012 consensus estimate is currently $5.57, corresponding with 15% EPS growth.

Sherwin-Williams has had to contend with an abysmal housing market over the last few years, but it has still managed to grow EPS. When the housing market finally starts to improve, expect to see even stronger earnings growth.

Returning Value to Shareholders

Management has been returning value to shareholders through stock buybacks and dividend hikes. In fact, the company has raised its dividend every year since 1979.

Since 2000, it has increased its dividend at a compound annual rate of 9%:


It currently yields 1.6%.

The company also bought back 4.24 million shares of its stock through the first nine months of 2011.


Shares of SHW trade at 16.7x 12-month forward earnings, a premium to the industry median of 13.6x. But this is not unreasonable given Sherwin-Williams' above-average earnings growth rates.

The Bottom Line

With rising estimates, strong earnings growth potential, shareholder-friendly management and reasonable valuation, Sherwin-Williams offers a lot to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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