Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – May 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Sherwin Williams Company (SHW) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): The Sherwin-Williams Company is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers in North and South America. The Company has four segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. The Paint Stores Group markets and sells architectural paint and coatings, protective and marine products, original equipment manufacturer and product finishes. The Consumer Group develops, manufactures and distributes paint and coatings to third party customers. The Global Finishes Group develops, licenses, manufactures, distributes and sells a variety of protective and marine products, automotive finishes and refinished products, OEM product finishes and related products. Latin America Coatings Group meets the demands of its customers for consistent regional product development, manufacturing and distribution presence and approach.
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 -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4Â 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 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $291.79 |
| MG Value | $327.58 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $123.38 |
| Value Based on 0% Growth | $72.32 |
| Market Implied Growth Rate | 12.90% |
| Net Current Asset Value (NCAV) | -$27.71 |
| PEmg | 34.29 |
| Current Ratio | 0.82 |
| PB Ratio | 58.92 |
Balance Sheet – March 2015
| Current Assets | $2,766,000,000 |
| Current Liabilities | $3,379,000,000 |
| Total Debt | $1,123,000,000 |
| Total Assets | $5,859,000,000 |
| Intangible Assets | $1,427,000,000 |
| Total Liabilities | $5,390,000,000 |
| Outstanding Shares | 94,700,000 |
Earnings Per Share
| 2015 (estimate) | $10.91 |
| 2014 | $8.78 |
| 2013 | $7.26 |
| 2012 | $6.02 |
| 2011 | $4.14 |
| 2010 | $4.21 |
| 2009 | $3.78 |
| 2008 | $4.00 |
| 2007 | $4.70 |
| 2006 | $4.19 |
| 2005 | $3.28 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $8.51 |
| 2014 | $6.90 |
| 2013 | $5.67 |
| 2012 | $4.72 |
| 2011 | $4.11 |
| 2010 | $4.12 |
Dividend History
SHW Dividend data by YCharts
Conclusion:
Sherwin Williams Company is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.11 in 2011 to an estimated $8.51 for 2015.  This level of growth supports the market’s implied estimate of 12.9% annual growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value 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.  What do you think?  What value would you put on Sherwin Williams Company (SHW)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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