Sherwin-Williams (SHW)
Sector: Materials
Held since: 12 March 2020
Cost basis per share: $225.06
Portfolio allocation: 5.74% (#2 of 25 holdings)
Introduction
Sherwin-Williams, a global leader in the manufacture, development, distribution, and sale of paints and coatings to professional, industrial, commercial, and retail customers, has been a compelling investment opportunity for those seeking steady, long-term returns since its founding in 1866. The company's long history of success, consistent growth, and ability to navigate through various economic cycles have solidified its position as a high-quality compounder with a wide economic moat. In this in-depth analysis, we will explore Sherwin-Williams' business model, competitive advantages, growth opportunities, capital allocation strategy, and the key factors that contribute to its status as a high-quality investment, with a particular focus on how the company is positioned to benefit from the secular trend of millennial household formation and the consolidation of the global paints and coatings industry.
From the perspective of a concentrated, long-term investor, Sherwin-Williams aligns perfectly with the investment philosophy of seeking businesses with durable competitive advantages, high returns on invested capital, long runways for reinvestment, and owner-operated management teams. Throughout this analysis, we will view Sherwin-Williams through this lens, highlighting the company's unique strengths and the reasons behind its position as a core holding in a concentrated, high-conviction portfolio.
Business Model and Key Assets
Sherwin-Williams is a key supplier to contractors and homeowners, offering a wide range of paints, coatings, and related products through its three main segments: The Paint Stores Group, The Consumer Brands Group, and The Performance Coatings Group. The company's most valuable assets are its extensive North American network of nearly 4,700 standalone stores and its sterling reputation among professional customers.
Professional contractors value Sherwin-Williams' brand, product quality, and store proximity far more than DIY customers. The company's well-known products offer desirable characteristics such as superior coverage (fewer coats needed), durability (longer-lasting), shorter cure times (less waiting time), and ease of application. These attributes, combined with Sherwin-Williams' commitment to customer service and support, have made it the preferred choice for professionals in the painting industry.
Sherwin-Williams' business is intensely local, as the size and weight of its products make it cost-prohibitive to import or distribute over long distances. The company's highly dispersed and always-in-a-hurry end-user base makes a broad store network essential for success. By controlling its own distribution channels, Sherwin-Williams can quickly and efficiently update prices across its entire network with the press of a button at its headquarters.
From a long-term investor's perspective, Sherwin-Williams has an "installed base" that essentially includes every building, structure, bridge, boat, and airplane on Earth, providing a stable and predictable demand for the company's products. This vast installed base, combined with the company's controlled distribution model and strong relationships with professional contractors, forms the foundation of Sherwin-Williams' enduring success.
Economic Moat and Competitive Advantages
Sherwin-Williams' wide economic moat is built upon several key pillars, including its controlled distribution, brand equity, scale economies, and pricing power.
Controlled distribution: Sherwin-Williams' extensive network of company-operated stores is a significant competitive advantage, enabling the company to ensure a consistent brand experience, foster direct customer relationships, and offer superior service and support. From the perspective of a long-term investor, this vertically integrated model allows Sherwin-Williams to maintain tight control over product quality, costs, and the customer experience. Competitors cannot easily replicate this distribution network, as the top three players control about half the industry and factories are not readily available for acquisition.
Brand equity: With a history spanning over 150 years, Sherwin-Williams has built a strong reputation for quality, innovation, and reliability. The company's flagship brand is widely recognized and trusted by professionals and DIY customers alike, translating into customer loyalty and pricing power. A long-term investor would emphasize the importance of Sherwin-Williams' brand loyalty among professional contractors, who rely on the company's products and services to complete jobs efficiently and profitably.
Scale economies: As one of the largest players in the industry, Sherwin-Williams benefits from significant economies of scale in procurement, manufacturing, and research and development. These advantages enable the company to maintain higher margins, offer competitive prices, and continuously improve its product offerings. From a long-term investor's perspective, Sherwin-Williams' scale economies allow it to invest more in growth initiatives and return capital to shareholders, further strengthening its competitive position.
Pricing power: Paint tends to be a small portion of the overall cost of a typical project (10-15%, with the rest being labor), giving Sherwin-Williams significant pricing power. The company's ability to control its own distribution allows it to efficiently implement price changes across its entire network. A long-term investor would emphasize the importance of this pricing power, as professional contractors are willing to pay a premium for Sherwin-Williams' products due to the productivity gains and superior results they offer.
From a long-term investor's perspective, the unique "people element" in Sherwin-Williams' business model is also noteworthy, with both the demand and supply sides heavily influenced by human relationships. The company's stores serve as a focal point for professional contractors, fostering loyalty and creating high switching costs. This people-driven aspect of the business helps to insulate Sherwin-Williams from potential disruption, as the value of these relationships cannot be easily replicated by technology or new entrants.
Runway for Reinvestment and Growth
Sherwin-Williams has substantial opportunities for growth and reinvestment, both organically and through acquisitions.
Store expansion: With a current footprint of nearly 4,700 stores and a long-term potential for 6,000 stores in North America alone, Sherwin-Williams has ample room for organic growth. The company plans to open approximately 100 new stores per year, further expanding its market share and stealing business from smaller rivals. From a long-term investor's perspective, this store expansion is a particularly attractive reinvestment opportunity, as Sherwin-Williams' stores generate extremely attractive unit-level economics, with high sales per square foot and return on invested capital (ROIC). By continuing to expand its retail footprint in a disciplined manner, Sherwin-Williams can drive incremental revenue growth and market share gains for years to come.
Market consolidation: The global paints and coatings industry is consolidating, forming into a global oligopoly. As a market leader, Sherwin-Williams is well-positioned to benefit from this trend. The company has a long runway for M&A, as the paint business is considered very high-quality, and Sherwin-Williams has a proven track record of successfully integrating acquisitions. A long-term investor would view Sherwin-Williams' disciplined approach to acquisitions as a key driver of long-term value creation, as the company focuses on targets that enhance its technological capabilities, product offerings, or geographic presence.
Repainting demand: Approximately 80% of Sherwin-Williams' paint volumes are used for repainting existing structures. Homeowners view repainting as a low-cost, high-return way of increasing the value of their homes before selling, providing a steady stream of demand for the company's products. From a long-term investor's perspective, this recurring revenue stream contributes to the stability and predictability of Sherwin-Williams' business model, further enhancing its appeal as a long-term investment.
Attractive Unit Economics and the Power of Simplicity
A long-term, concentrated investor places a strong emphasis on understanding the unit economics of a business, particularly in industries with a significant "people element" on both the demand and supply sides. In the case of Sherwin-Williams, the key unit to analyze is the individual paint store.
The customer of a Sherwin-Williams store is typically a professional painter or contractor. For these customers, the cost of paint is only about 10% of the total cost of a job, with labor accounting for the remaining 90%. However, the choice of paint can have a significant impact on the productivity and profitability of the contractor. Higher-quality paints like those sold by Sherwin-Williams require fewer coats and dry faster, allowing the contractor to complete jobs more efficiently. Additionally, the personalized service and support provided by Sherwin-Williams' stores, such as color matching and on-site delivery, further enhance the value proposition for contractors.
The result is that Sherwin-Williams can charge a premium price for its products, as the incremental cost is more than offset by the productivity gains for the customer. This dynamic creates a virtuous cycle, where Sherwin-Williams' higher prices fund investments in R&D, customer service, and store expansion, which in turn drive customer loyalty and market share gains.
At the store level, this translates into highly attractive unit economics. Sherwin-Williams stores generate average sales per square foot of over $600, which is among the highest in the retail industry. The company's vertically integrated model and scale economies allow it to maintain gross margins of over 50%, while its lean operating structure and high sales productivity result in store-level EBITDA margins of over 20%. These strong unit economics provide Sherwin-Williams with ample cash flow to reinvest in growth initiatives and return capital to shareholders.
From a long-term investor's perspective, the power of simplicity in Sherwin-Williams' business model is also noteworthy. The company's investment thesis can be distilled into a few key points: a vast installed base, a vertically integrated distribution network, strong brand loyalty among professional contractors, and attractive unit economics at the store level. By focusing on these core drivers of value, a long-term investor can maintain a high level of conviction in Sherwin-Williams as a long-term holding, even in the face of short-term market volatility or economic uncertainty.
Capital Allocation and Shareholder Returns
Sherwin-Williams' management has been a fantastic steward of capital, consistently creating value for shareholders through a disciplined and balanced approach to capital allocation.
Dividends: Sherwin-Williams has an impressive track record of returning cash to shareholders, with 2023 marking the 45th consecutive year of dividend increases. The company's strong cash flow generation and commitment to shareholder returns have made it an attractive choice for income-seeking investors. From a long-term investor's perspective, Sherwin-Williams' dividend growth is a testament to the company's financial strength and management's confidence in its long-term prospects.
Share buybacks: Sherwin-Williams uses a significant portion of its cash flow to opportunistically buy back shares, enhancing per-share intrinsic value growth. The company's disciplined approach to share repurchases has been a hallmark of its capital allocation strategy. A long-term investor would appreciate management's willingness to return excess cash to shareholders through buybacks, as it demonstrates a focus on maximizing long-term shareholder value.
Clear communication: Sherwin-Williams is known for having the best shareholder communication in the industry. The company provides a clear framework for consistent capital allocation, emphasizing its commitment to never holding excess cash. This transparency and discipline instill confidence in shareholders and demonstrate management's focus on long-term value creation. A long-term investor values this level of transparency, as it allows for a better understanding of management's thought process and helps to align the interests of shareholders and the company.
Disciplined M&A: Sherwin-Williams has a proven track record of making value-enhancing acquisitions that strengthen its competitive position and expand its growth opportunities. The company's acquisition of Valspar in 2017, for example, significantly expanded its global reach and added complementary product lines in packaging and coil coatings. From a long-term investor's perspective, Sherwin-Williams' disciplined approach to M&A is a key driver of long-term value creation, as the company focuses on targets that enhance its technological capabilities, product offerings, or geographic presence.
Reinvestment in the business: Sherwin-Williams consistently reinvests a portion of its cash flow back into the business to support organic growth initiatives, such as new store openings, product innovation, and marketing efforts. These investments help to maintain the company's competitive advantages and drive long-term growth. A long-term investor would view these reinvestments as a sign of a high-quality business with a sustainable competitive advantage and a long runway for growth.
Culture and Human Capital
Sherwin-Williams' success is underpinned by its strong corporate culture and investment in human capital.
Employee retention: The company boasts lofty employee retention rates, suggesting a knowledgeable labor force with institutional memory and embedded customer relationships. This loyal and experienced workforce reinforces a service-oriented culture that sets Sherwin-Williams apart from its competitors. From a long-term investor's perspective, this employee retention is a key competitive advantage, as it contributes to the stability and consistency of the company's operations and customer relationships.
Management continuity: Sherwin-Williams has a history of long-tenured CEOs and management team members, providing stability and consistency in the company's strategy and execution. This continuity has been a key driver of the company's long-term success and ability to navigate through various economic cycles. A long-term investor appreciates this management continuity, as it aligns with their preference for owner-operated businesses with a long-term focus.
Focus on training and development: Sherwin-Williams invests heavily in employee training and development programs, such as its Management Training Program, which has produced many of the company's current leaders. This commitment to talent development ensures a deep bench of skilled professionals who can drive the company's future growth and success. From a long-term investor's perspective, this investment in human capital is a sign of a high-quality business with a sustainable competitive advantage.
Entrepreneurial spirit: Sherwin-Williams fosters an entrepreneurial culture that encourages employees to think like owners and make decisions that benefit the long-term success of the company. This mindset aligns well with the interests of long-term shareholders and contributes to the company's ability to adapt to changing market conditions and seize new growth opportunities.
Customer-centric focus: Sherwin-Williams' culture is deeply rooted in a commitment to customer service and satisfaction. The company's employees are trained to prioritize the needs of their customers and go above and beyond to ensure their success. This customer-centric focus helps to build strong, long-lasting relationships with professional contractors and other key customers, further reinforcing Sherwin-Williams' competitive advantages.
Secular Theme: Millennial Household Formation
One of the most compelling tailwinds for Sherwin-Williams is the ongoing trend of millennial household formation. As the largest generation in the United States, millennials are entering their prime homebuying years, driving demand for housing and, consequently, paints and coatings.
Several factors contribute to the strength and durability of this trend:
Pent-up demand: Many millennials delayed homeownership due to the Great Recession, student loan debt, and rising housing costs. As economic conditions improve and millennials reach their 30s and 40s, they are increasingly ready to purchase homes.
Preference for homeownership: Despite the challenges faced by millennials, the desire for homeownership remains strong. A recent study by the National Association of Realtors found that millennials accounted for the largest share of home buyers (38%) in 2024.Â
Aging housing stock: The median age of owner-occupied homes in the United States is approximately 40 years. As millennials purchase older homes, they are likely to undertake renovation and remodeling projects, driving demand for architectural paints and coatings.
Focus on personalization: Millennials are known for their desire to express their individuality and create unique living spaces. This trend translates into a willingness to invest in home improvements, including painting and decorating.
Sherwin-Williams is uniquely positioned to capitalize on the millennial household formation trend:
Strong brand recognition: Sherwin-Williams' well-established brand and reputation for quality resonate with millennials who value authenticity and reliability.
Extensive store network: With nearly 4,700 paint stores across the United States, Canada, and the Caribbean, Sherwin-Williams is well-positioned to serve millennials in their local communities, offering convenience and personalized service.
Innovative products: Sherwin-Williams' commitment to product innovation ensures that it can meet the evolving preferences of millennial consumers, including a focus on eco-friendly, low-VOC (volatile organic compound), and high-performance coatings.
Omnichannel presence: Sherwin-Williams' strong online presence and e-commerce capabilities align with millennials' digital-first shopping habits, enabling the company to engage with customers across multiple channels.
As millennial household formation continues to drive housing demand and home improvement spending, Sherwin-Williams is poised to benefit from this powerful demographic trend. The company's strong brand, extensive distribution network, innovative products, and customer-centric approach position it to capture a significant share of the growing demand for architectural paints and coatings.
From a long-term investor's perspective, the millennial household formation trend is a key driver of long-term growth for Sherwin-Williams. The company's ability to cater to the unique preferences and needs of this generation, combined with its strong competitive position and attractive unit economics, make it a compelling investment opportunity for those seeking to benefit from this secular trend.
Risks and Challenges
While Sherwin-Williams has numerous strengths and a compelling long-term growth outlook, it is not immune to risks and challenges. A long-term investor must acknowledge these potential headwinds but also consider the company's competitive advantages and strong management team that position it well to navigate these challenges.
Economic sensitivity: Although demand for paint is relatively inelastic, Sherwin-Williams' business is still influenced by overall economic conditions, particularly in the housing market and construction industry. An economic downturn or recession could lead to reduced demand for the company's products and pressure on pricing and margins. However, from a long-term investor's perspective, Sherwin-Williams' strong brand, loyal customer base, and cost control measures help mitigate this risk.
Raw material costs: Sherwin-Williams' profitability can be impacted by fluctuations in the prices of key raw materials, such as titanium dioxide, petrochemicals, and other oil-based derivatives. While the company has some ability to pass on cost increases to customers, there can be a lag effect that pressures margins in the short term. A long-term investor would note that Sherwin-Williams' scale and purchasing power help to minimize the impact of raw material cost volatility.
Competition: Although Sherwin-Williams has a strong competitive position, it still faces competition from other large players like PPG and Benjamin Moore, as well as smaller regional and local competitors. The company must continually invest in innovation, marketing, and customer service to maintain its market share and pricing power. From a long-term investor's perspective, Sherwin-Williams' vertically integrated model, strong brand, and close relationships with professional contractors create high barriers to entry for new competitors.
Environmental regulations: As environmental awareness grows, there is increasing pressure on paint manufacturers to develop more sustainable and eco-friendly products. Sherwin-Williams must navigate a complex regulatory landscape and invest in R&D to meet evolving customer demands and stay ahead of potential regulatory changes. A long-term investor would view Sherwin-Williams' proactive approach to sustainability and innovation as a strength that positions the company well to adapt to changing regulations and consumer preferences.
Execution risk: Sherwin-Williams' growth strategy relies on its ability to successfully execute on store expansions, acquisitions, and product innovations. Any missteps in these areas could negatively impact the company's financial performance and competitive position. However, from a long-term investor's perspective, Sherwin-Williams' experienced management team, disciplined capital allocation, and track record of success help to mitigate this risk.
Technological disruption: While the paint industry has been relatively slow to adopt new technologies, there is always the risk of disruptive innovation that could alter the competitive landscape. For example, advancements in digital color matching, 3D printing, or self-cleaning coatings could potentially impact demand for traditional paint products. A long-term investor would monitor these technological trends but also recognize that Sherwin-Williams' strong R&D capabilities and customer relationships position it well to adapt to and capitalize on new innovations.
Despite these risks and challenges, a long-term investor would maintain a high level of conviction in Sherwin-Williams as a long-term investment. The company's enduring competitive advantages, strong financial position, and proven ability to adapt to changing market conditions give a patient investor confidence in its ability to continue creating value for shareholders in the face of short-term headwinds or disruptions.
Conclusion
Sherwin-Williams is a high-quality compounder with a wide economic moat, positioned for long-term growth in the consolidating global paints and coatings industry. The company's controlled distribution, strong brand equity, scale economies, and pricing power provide durable competitive advantages that have enabled it to consistently outperform its peers and generate superior returns on invested capital.
From the perspective of a long-term, concentrated investor, Sherwin-Williams' attractiveness lies in its ability to compound value over time through a combination of organic growth, strategic acquisitions, and disciplined capital allocation. The company's vertically integrated model, owner-operator mindset, and strong corporate culture create a virtuous cycle of reinvestment and value creation that is difficult for competitors to replicate.
Sherwin-Williams' runway for reinvestment and growth is substantial, driven by organic store expansions, industry consolidation, millennial household formation, and steady repainting demand. The company's strong free cash flow generation and pristine balance sheet provide ample firepower for these growth initiatives.
What sets Sherwin-Williams apart from many other companies is the simplicity and durability of its value proposition. By focusing on the core drivers of its business – a vast installed base, a controlled distribution network, brand loyalty among professional contractors, and attractive unit economics – Sherwin-Williams has been able to deliver consistent, profitable growth through various economic cycles. This simplicity and focus allow long-term investors to have a high degree of confidence in the company's ability to execute its strategy and create shareholder value over time.
Another key factor that makes Sherwin-Williams a compelling long-term investment is its disciplined capital allocation strategy, focused on dividends, share repurchases, and clear shareholder communication. Management's track record of delivering on its commitments and allocating capital effectively has built trust with investors and positioned the company as a core holding for many patient, long-term shareholders.
While Sherwin-Williams is not immune to risks and challenges, such as economic sensitivity, raw material cost fluctuations, and potential technological disruption, the company's strong competitive position and experienced management team have demonstrated an ability to navigate these headwinds effectively. From a long-term investor's perspective, these risks are outweighed by the company's enduring competitive advantages, strong financial position, and numerous growth opportunities.
In conclusion, Sherwin-Williams is a high-quality, wide-moat compounder that belongs in the portfolio of any long-term investor seeking to benefit from the attractive dynamics of the global paints and coatings industry. The company's unique combination of competitive advantages, growth opportunities, disciplined capital allocation, and strong corporate culture make it a rare find in today's market – a true "forever stock" that can be owned with confidence through various economic and market cycles. By taking a patient, long-term approach and focusing on the key value drivers of the business, investors can participate in the enduring success of this exceptional company and compound their capital at attractive rates over time.
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