Sherwin-Williams (NYSE: SHW) Stock Is A Buy

Right From The Horses Mouth

I may be showing my age and/or upbringing by using adages like “straight from the horses” mouth but so what? For those in the know, it rings true and is a saying every trader should take to heart. After all, who better to know the fundamental condition of a company and its outlook than its managers? The best the analysts can do is make projections, the CEOs and CFOs have their fingers on the pulse of their respective businesses. When the CEOs and CFOs say business is picking up investors should listen.

Today’s news includes such a scenario. Sherwin-Williams (SHW), a maker of paints and coatings, has raised its guidance. The company says the COVID-19 pandemic has spurred a wave of home improvement projects that include fresh paint. Management still sees YOY revenue in the second quarter as down but only down mid-single digits versus the previous low to mid-teens. That’s a difference of roughly 1000 basis points and reason enough for investors to cheer.

Consumer Brands Leads The Charge

The news is goods and highlights trends at other home-improvement retailers like Home Depot (HD), Lowe’s (LOW), and Target (TGT); people forced to stay home are spending their money on their homes. What this means for Sherwin-Williams is that strength in Consumer Brands is offsetting weakness in the other two business segments.

The Americas Group (wholesale/contractor) and Performance Group (Industrial) are both looking at declines in the range of -10 to -20%, their guidance was not changed. The Consumer Brands group, however, is expected to see revenue “significantly above the high end” of the previously stated range. That range was up high-single to low-double digits. What, exactly, “significantly” above means is open to interpretation but I have to say I like the sound of it.

The current consensus for the second quarter is -11.25% compared to the new guidance of roughly -5.0%. That’s quite a difference. If Sherwin-Williams even only meets its new guidance that means the full-year outlook is too low as well. What this means for the analysts or, I should say, the analyst’s community is a round of upgrades and price target increases. That’s good for market sentiment and share prices.

Over Valued? I Think Not

Going into Monday morning it may have looked like Sherwin-Williams was overvalued but that has all changed. With the new second-quarter guidance we can assume an implied increase to full-year results which automatically knocks the stock’s valuation down a peg or two. Now, the 29.5X forward earnings it closed at on Friday seems more reasonable. Sherwin-Williams is still trading at a higher valuation than PPG Industries (23X) but PPG didn’t just increase its guidance. Other names in the home improvement space, notably Home Depot and Lowe’s, are trading at 24X and 20X their forward earnings.

In terms of the dividend, Sherwin-Williams pays a dividend and it’s a healthy one but only icing on the cake. At today’s prices, the yield is sub-1% and less attractive than PPG (PPG), HD and LOW but the yield is mitigated by the growth outlook. The company is expected to produce positive revenue growth in 2020, the outlook for growth in 2020 is improving, and the forecast for 2021 is robust at near-25%. Nothing to not like in that. And then there is the technical picture.

The Technical Outlook: On Watch For A Break Out

The technical outlook for this stock is bullish but there is one caveat. Despite the uptrend, last week’s confirmation of support, and the indicator set-up there is a chance the stock will not move higher. Today’s news has share prices up and extending last week’s bounce but not above the current all-time high. If resistance at this level prevents price action from moving higher or results in a strong sell-signal this stock could be in for a deep correction.

If not, if price action moves to a new high this stock is a screaming buy. If (when) this blue-chip, home-improvement, dividend-paying growth story does move above resistance the next targets are $675 (for the near-term) and  $750 to $800 over the next 12 to 24 months.