Sleep-At-Night Stock Sherwin-Williams Is Ready To Rebound

Key Points

• Sherwin-Williams is a sleep-at-night stock that is getting attention from analysts. 
• The capital returns are solid and should continue unabated. 
• The long-term outlook includes S&P 500-beating performance. 

Sherwin-Williams NYSE: SHW shares prices have been under pressure for over a year, but those times are ending. The pressure is due to economic headwinds, high inflation, and sluggish housing markets, but now the outlook is brightening. The outlook isn’t rosy, but analysts see housing markets as “better than expected” in the near term and as a driver of earnings growth outperformance over the long. The takeaway for investors is that sell-side sentiment is brightening, and the market is ready to rebound. 

Analysts Sentiment Shifts In Sherwin -Williams

The analysts' sentiment toward Sherwin-Williams has been shifting for the better since the Q1 earnings release in April. The company has 19 analysts rating it at Moderate Buy, and 7 have issued revisions or initiated coverage since. Among the key data points are sentiment is up from Hold on a YOY basis, and the price target has begun to firm.

The consensus price target of $261.60 is about 6% above the recent action and down compared to last year, but it has begun to trend higher again. The 7 new reports include 6 upward price target adjustments, and all but 1 are above the consensus.

The range of targets excluding the outlier, is $265 to $275 and may move higher before the following earnings report is released. 

BMO and Jeffries are responsible for 2 upgrades. They upgraded the stock to Outperform and Buy with price targets at the top-end of the range. In their view, easing raw materials costs and housing market conditions will support earnings growth and strength relative to the S&P 500.

Sherwin Williams is expected to report Q2 results at the end of July, and it may have a high bar to beat. There have been 19 upward revisions to revenue and earnings since the last report, and more are expected. The consensus is for revenue and earnings to grow by 2.5% and 9%, far better than the -0.5% and -6.5% expected for the broad market, and data from home builders support the outlook. Home builders are heading toward a revenue and earnings cliff but sustaining relative strength due to the backlogs. 

Sherwin-Williams Capital Returns Are Reliable 

Sherwin-Williams stock doesn’t pay a high yield, but it does pay a reliable distribution that can also be counted on for growth. The stock yields about 1.0% with shares near $250, but the payout ratio is low at 30%, suggesting another 46 years of consecutive annual increases are possible.

The next increase is due in November of 2023 and should run from 8% to 10%, and there is a bonus in the form of share repurchases. The company repurchased 1.3 million shares in Q1, or about 0.5% of the float, and it has $43.9 million left under the current authorization.

That’s worth about 17% of the float. The balance sheet is sound; the company carries debt, but assets are up, and liabilities are down despite the capital returns. 

Institutions partly own the stock for the dividend, and they have been buying with shares at long-term lows. The institutions own about 75% of the stock and are buying on balance at 1.3:1 for the last 12 months. The buying picked up in the 1st half of 2023 and may accelerate again, given the shift in analysts' sentiment. 

The Technical Outlook: Sherwin-Williams Is Moving Up From The Bottom 

The price action in Sherwin-Williams shares formed a bottom over the last year and looks ready to begin moving higher. The market is above the 150-day moving average with bullish indicators that suggest a move to $260 is possible. The market may move above that level before the following earnings report; if so, the next target for resistance is $280, which may be harder to overcome.