Sherwin Williams: Paint The World

Sherwin Williams has been around since 1866 and stands as a trusted household name in the US. SHW has ~45% market share in North America. The company's most profitable segment is with Pro customers which have consistently taken share from DIY for the past 4 decades and now garner 61% share of industry demand. Importantly, Pro customers are less price-sensitive and more concerned with quality and performance attributes.

A combination of strong brands and high-quality paints confer a level of pricing power to Sherwin.

Sherwin has demonstrated remarkably consistent performance over a long period. In the last 30 years, the company has compounded Revenue and Operating Income at a rate of 7.1% and 9.5% respectively. Return on invested capital (ROIC) has also averaged ~22% over the last 20 years which is incredibly impressive. This is a winning business model with deep moats that will likely enable it to continue to compound for decades to come.

Sherwin is selling a basic good, in a concentrated market, and generating phenomena returns.. This is a business with massive economies of scale and with virtually no substitutes.

Whilst demand is tied to the housing market, new housing only contributes just 12% of volume in the US. The rest comes from residential, industrial, and commercial offering some diversification through the cycle. Each of these markets tends to peak at different times whilst all remaining procyclical.

Repaint is a recurring form of demand with the average homeowner repainting every 7 years.

The concentrated industry has led to rational price action, allowing manufacturers to pass through higher costs, albeit at a lag. Pricing power is crucial for generating economic value over the long run in a concentrated industry.

Higher Margins

Sherwin has been impacted by higher raw material costs following supply chain bottlenecks and higher oil prices. The company was able to pass much of these costs through at a lag and inputs have finally started to come down. SHW will benefit from declining input costs whilst maintaining the price gains achieved during a period of high inflation. Investors should expect higher margins as demand returns and the company achieves greater operating leverage.

A Reacceleration In US Housing

There is a structural shortage in US housing and demographics indicate that demand is set to grow markedly over the coming decade. This should create incremental new demand as new home construction grows in the US. The catalyst for initiating this growth will be lower rates which we are beginning to experience in the back half of 2024.

Technological Advancements

Continued investment in R&D to develop more innovative, durable, and efficient coating products, such as those for electric vehicles or advanced industrial applications, could position Sherwin-Williams as a leader in new, high-growth sectors.

Sherwin continues to invest in technology that aids their customers, whether it is more durable paints which require less costs, or online ordering and delivery that results in less time wasted collecting materials. These small improvements help the customer directly and deepen brand affinity.