A Fixer-Upper Stock on the Mend

SHERWIN-WILLIAMS STANDS at ground zero of the U.S. and, to some extent, the global slowdown.

It's no secret that the markets for its paints and other coatings -- housing, commercial and industrial construction, autos and a panoply of industrial goods -- remain in a hurt locker. Take existing home sales, the all-important source of paint purchases by folks spiffing up their dwellings for sale, or wanting to redecorate after a purchase. The year-over-year sales have been largely negative for most of the past three years.

Yet Sherwin-Williams' stock (SHW) has shown uncommon resilience. Trading at 58, it's well above a 52-week low of 42 (set in March's market swoon), and not far off a recent high near 64. That's well above the 53.50 the shares fetched in April, when Barron's sounded a cautionary note on the stock.

Lately, we've turned more favorable toward the Cleveland-based company, which dates to 1866. For one thing, the economy seems to be reviving more than commonly appreciated (gross domestic product and productivity have surged, even as unemployment keeps rising) -- which augurs well for sales of paint, coating and other finishes. Second, by any measure one cares to look at, whether operating margins, return of assets, dividend growth, technology or business model, Sherwin-Williams is uncommonly well run.

For example, it's been able to raise its dividend for each of the past thirty years without skimping on store expansion or research and development over the same period. Sherwin's chairman and chief executive officer, Christopher Connor, who has been at the helm for the past ten years, is adjudged shareholder-friendly in using the significant free cash flow to buy in shares -- thereby driving the fully-diluted share count down from 156.9 million in 2001 to 116.8 shares in 2008.

To be sure, Sherwin hasn't emerged unscathed from the difficult economy. On Oct. 20, it disclosed that its third-quarter revenue had slid some 12%, to $2 billion from a year-earlier $2.3 billion. Nonetheless, earnings were up a penny, to $1.51 a share, owing to a healthy drop in raw-material costs, the lower share count and lower selling, general and administrative expenses. Yet the stock plummeted by 6% that day, ending at 59.04. The big culprit: disappointment over fourth-quarter company guidance, which put expected earnings at 35 to 55 cents a share, versus the 61 cents the Street had projected.