Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Defensive Companies.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Sherwin-Williams Company (SHW)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â The Sherwin-Williams Company (Sherwin-Williams) is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe and Asia. The Company has four segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. In September 2013, Sherwin-Williams Co announced that it has completed the acquisition of the United States/Canada business of Consorcio Comex, S.A. de C.V.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$98.51|
|Value Based on 0% Growth||$57.75|
|Market Implied Growth Rate||10.51%|
|Net Current Asset Value (NCAV)||-$15.74|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Sherwin-Williams is not suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has concerns with the low current ratio and the high PEmg and PB ratios while the Enterprising Investor is concerned with the high level of debt relative to current assets. Â As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through theÂ ModernGraham Valuation Index. Â As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.13 in 2010 to an estimated $6.79 for 2014. Â This strong level of demonstrated growth supports the market’s implied estimate of 10.51% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Sherwin-Williams Company (SHW)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Sherwin-Williams Company (SHW) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.