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Need investing or painting ideas? Ask Sherwin-Williams

7:30 PM, Feb. 16, 2013  |  Comments
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It is no real surprise that pseudo experts' promised investment returns are rarely, if ever, forthcoming. Yet a cornucopia of quality investments is readily available to virtually everyone. A good example is Sherwin-Williams (SHW), the nation's largest paint manufacturer.

Founded in 1866, Sherwin-Williams is a global leader in the manufacture, development, distribution, and sale of coatings and related products to professional, industrial, commercial and retail customers.

When I wrote about the company a year ago, the shares were trading at $99.80. My 12-month projected share price was $112 pegged to estimated 2012 earnings of $5.45 per share. Earnings came in at $6.49 per share and the shares recently closed at $165.45 for a one-year capital gain of 65.8 percent.

Annual sales for 2012 increased 8.8 percent to $9.53 billion, with acquisitions accounting for about 0.9 percent of the increase. An unfavorable exchange rate environment reduced sales by 1.8 percent and lowered net income by $.13 per share. This was partially offset by a stock buy-back 4.6 million shares during 2012.

Net operating cash flow was $887.9 million, while the company's working capital ratio (accounts receivable plus inventories less accounts payable divided by sales), excluding acquisitions, came in at 10.7 percent as compared to 10.9 percent a year ago. The annual cash dividend for 2012 was $1.56 per share.

The balance sheet is well positioned for the anticipated closing of the Comex acquisition. Sherwin-Williams borrowed approximately $1 billion during the fourth quarter at an average rate of 2.1 percent.

In its forward looking guidance for the first quarter of 2013, Sherwin-Williams anticipates net sales will increase at a low-single digit percentage rate, while net income is expected to be in the range of $1.03 to $1.13 per share.

For all of 2013, the company expects net sales to increase above 2012 levels by a mid-single digit percentage, generating net income of between $7.45 and $7.55 per share, excluding any effects from the proposed Comex acquisition.

The intrinsic value of the shares using a discounted earnings model, with an earnings growth rate of 15.56 percent and a discount rate of 15 percent is $184 per share. The more conservative free cash flow to the firm methodology yields an intrinsic value of $179 per share.

My earnings estimate for 2013 is $7.80 per share, with a 12-month target price on the shares of $184 for a capital gain of about 12 percent. In addition, there is an indicated dividend of $2 or 1.2 percent.

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