Media Talk

Painting Profits with Sherwin Williams

Sherwin Williams (SHW) has been added to Northlake’s individual stock portfolio.  SHW is the type of high quality, long-term growth company we prioritize.  The company is in the process of integrating the acquisition of Valspar.  We have been awaiting more clarity on progress of the integration and an updated multiyear outlook to confirm our bullish outlook for SHW.  We received that today at the company’s analyst meeting.

The outlook to 2020 is for 9-12% EPS growth, 380 basis points in profit margin expansion, return of the balance sheet to its usual strength, and above average growth in the dividend.  Management showed confidence by unexpectedly raising its synergy guidance for Valspar.  Each of these long-term goals is at least met our expectations and gives us confidence that now is a good time to initiate positions in SHW.  We see the shares heading to $400-500 over the next few years as they trade at 20X forward adjusted EPS that will exceed $20 in 2018 and $25 in 2020.

According to its investor relations website, SHW has been in business since 1866 and increased its dividend annually since 1979.  The company describes its core business as “manufacture, distribution, and sale of coatings and related products.”  Most individuals know SHW as a paint company with stores spread throughout the country.  These stores serve individuals but are most effective in the “do it for me” market serving painting contractors.  SHW also provides paints and coatings to Lowe’s and industrial markets.

The acquisition of Valspar moves SHW more heavily into performance coatings and international markets.  This diversification should help long-term growth and reduces risk modestly by lowering exposure to U.S. housing.

Northlake views SHW as a blue chip investment built for the long-term.  The primary risk to our investment thesis is a slowdown in the U.S. economy, specifically in housing.  We believe the U.S. housing market is in the sixth inning of its current upcycle.  A recession or materially higher mortgage rates could derail the cycle but we do not see either in the near future.  Northlake has long held that normalization of monetary policy accompanied by slowly rising interest rates would not derail the economy.  Put simply, interest rates have been so low that an increase of 1-2% in mortgage rates would slow but not reverse the housing and industrial markets served by SHW.

SHW shares are impacted on a day-to-day basis by investor sentiment toward interest rates and oil prices.  Those markets can be volatile and push SHW shares in either direction.  Our investment thesis is built upon management’s forecast for 9-12% earnings growth through 2020.  Based on management history, we believe the forecast has a cushion and will prove conservative barring a sharp slowdown in the U.S. economy.

SHW is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  AAPL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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