Sherwin-Williams: A colorful success

Sherwin-Williams is one of the largest paint and coatings companies in the world, serving homeowners, professional painters, builders, and industrial clients. With trusted brands, its own factories and supply chain, and thousands of company-run stores, the company has built a strong position across North America. It continues to grow by opening new stores, deepening relationships with contractors and homebuilders, and positioning itself to benefit from long-term trends in housing. The question is: Does this leading paint company deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Sherwin-Williams at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Sherwin-Williams, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Sherwin-Williams, founded in 1866 and headquartered in Cleveland, Ohio, is a leading global supplier of paints, coatings, and related products. The company develops, manufactures, distributes, and sells its products to a wide range of customers including professional contractors, industrial manufacturers, commercial clients, and retail consumers. Its core operations are in North and South America, but it also has a growing presence in Europe, Asia, Australia, and the Caribbean. The business is organized into three main segments. The Paint Stores Group operates nearly 4.800 company-owned stores across the United States, Canada, and the Caribbean, selling Sherwin-Williams branded products directly to professional painters and homeowners. This segment benefits from a high degree of customer loyalty and pricing power, making it a central pillar of the company’s strategy. The Consumer Brands Group manufactures and distributes both branded and private-label products through third-party retailers such as Lowe’s, Walmart, hardware stores, and independent dealers. It also operates around 330 stores in Latin America. The Performance Coatings Group focuses on industrial coatings for applications including automotive refinish, packaging, wood and metal finishing, and marine and protective coatings. These products are sold globally through a mix of company branches, direct sales, and distributors. Sherwin-Williams benefits from a durable competitive moat driven by brand strength, vertical integration, scale, and customer relationships. The Sherwin-Williams brand has earned the trust of professionals for more than 150 years, resulting in deep customer loyalty and strong painter retention. The company’s vertically integrated model, spanning from research and manufacturing to direct retail, allows it to maintain control over quality, service, and supply chain responsiveness. This was particularly evident during the COVID-19 pandemic, when its in-house production and store network enabled it to maintain supply and gain share while competitors reliant on third-party channels faced disruptions. The company’s retail footprint of over 5.000 locations provides a level of physical presence and customer engagement that is difficult for competitors to match. At the same time, its products are widely available through major retailers, giving it strong omnichannel distribution. Sherwin-Williams also enjoys significant scale advantages that translate into lower costs and higher margins. Its size allows it to invest meaningfully in product innovation and manufacturing efficiencies.

Management

Heidi Petz serves as the CEO of Sherwin-Williams, a role she assumed on January 1, 2024. She brings a deep understanding of the global paints and coatings industry, with a proven record of driving profitable growth, operational excellence, and customer-focused innovation across multiple business units. Heidi Petz joined Sherwin-Williams in 2017 through the acquisition of The Valspar Corporation, where she was already a senior leader. Since joining the company, she has held a series of key executive positions including President of the Consumer Brands Group, President of The Americas Group, and most recently, President and COO. Before her time at Sherwin-Williams and Valspar, Heidi Petz held leadership roles at several well-known companies, including Newell Rubbermaid, Target Corporation, and PricewaterhouseCoopers. These roles provided her with valuable experience across retail, consumer goods, and corporate strategy, all of which she has brought to bear in her work at Sherwin-Williams. Heidi Petz holds a bachelor's degree in Business and Leadership from the University of Richmond and a Master of Business Administration from Loyola University Maryland. She also serves on the Board of Directors of Ulta Beauty and the University Hospitals Health System. Her promotion to CEO followed a comprehensive, multi-year succession planning process designed to identify a leader who could build on Sherwin-Williams’ longstanding strengths. Heidi Petz was selected based on her ability to deliver results and lead high-performing teams, as well as her commitment to customers, employees, and long-term shareholder value. She is widely recognized for her customer-centric leadership style and for championing a performance-driven culture grounded in operational discipline and innovation. While new to the CEO role, Heidi Petz brings extensive institutional knowledge and continuity to the business, having led both consumer-facing and industrial segments within Sherwin-Williams. Given her experience, strategic mindset, and deep alignment with the company’s culture and long-term vision, I believe Heidi Petz is well-positioned to lead Sherwin-Williams into its next chapter of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Sherwin-Williams has consistently achieved a high ROIC above 10% throughout the past decade, and above 15% in nine of those ten years. There are several reasons behind this consistent outperformance. Sherwin-Williams operates a vertically integrated business model. It manufactures most of the products it sells, especially in its Paint Stores Group, which exclusively sells Sherwin-Williams branded products. This structure allows the company to capture more margin across each stage of the value chain - from research and production to distribution and retail - resulting in a high ROIC. Another key factor is the company’s high-margin direct-to-customer model. With approximately 5.000 company-operated stores across the Americas, Sherwin-Williams is able to sell directly to both professional contractors and homeowners. This model avoids the margin erosion typical of third-party distribution and enhances customer loyalty and pricing power. Brand strength and customer retention also contribute meaningfully. Professional painters, who are less price-sensitive and typically generate recurring demand, represent a large share of revenue. Sherwin-Williams retains roughly 78% of these customers, which supports a stable revenue base with minimal reinvestment needs. In addition, the company has demonstrated consistent pricing power and cost discipline. It has successfully passed on raw material cost inflation to customers, which has helped protect and expand margins even in periods of volatility. It is also worth noting that Sherwin-Williams posted its highest ROIC since 2016 in both 2023 and 2024, driven by improved margins.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Sherwin-Williams has managed to increase its equity in most years over the past decade. The company’s equity decreased in both 2020 and 2021, mainly because it was still absorbing costs from earlier acquisitions, such as Valspar. Since 2022, equity has increased every year. This is mostly due to higher profits. Prices of paint and coatings went up, demand stayed strong, and Sherwin-Williams kept costs under control, all of which supported profit growth. As a result, the company has been able to increase its equity year after year.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Sherwin-Williams has managed to deliver positive free cash flow in all 10 years. The company achieved its highest free cash flow in 2020 and has not quite reached that level since. However, this is largely due to higher capital expenditures, which have continued to rise each year since 2020, reaching an all-time high in 2024. In fact, capital expenditures in 2024 were more than triple the amount spent in 2020, which has affected both free cash flow and the levered free cash flow margin. The main reason for the elevated capital expenditures is the ongoing construction of a new headquarters and a new research and development center. These projects are expected to keep capital expenditures elevated through 2025. Free cash flow and the levered free cash flow margin declined in 2024 compared to 2023, but this was primarily due to capital expenditures increasing by more than 20 percent year over year. Once capital expenditures return to more typical levels, free cash flow and the corresponding margin should improve and may exceed previous highs. As free cash flow grows, shareholders can expect higher dividends and additional share repurchases, as Sherwin-Williams returns capital through both methods. The current low free cash flow yield suggests that the shares are trading at a premium valuation. However, we will revisit valuation later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Sherwin-Williams, I found that the company has 3,35 years of earnings in debt. This is slightly higher than I would prefer, but it is not alarming and would not keep me from investing in the company. Sherwin-Williams has noted that its interest expenses are expected to increase in the short term. Part of this is due to refinancing older debt at higher interest rates. In 2024, the company refinanced $850 million of debt, and it expects to refinance another $1 billion in 2025. Even with these added costs, management has said they plan to keep debt at a level they consider reasonable based on the company’s size and earnings power. This suggests that management is aware of the rising costs and is planning conservatively to keep debt at a reasonable level over time.

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Risks

Macroeconomic factors are a risk for Sherwin Williams. The company has recently stated that the overall demand environment remains weak and is likely to stay that way through at least the first half of 2025. Several of the markets that drive demand for Sherwin Williams' products, such as commercial construction, residential housing, and consumer do it yourself spending, are showing little sign of improvement, and some may not recover until 2026. For example, commercial building activity has slowed, especially in the multifamily housing sector, where new project starts have been down by double digits since mid 2023. Even if new projects begin in 2025, they typically do not translate into paint demand until construction is near completion, which could push actual sales recovery into 2026. Property maintenance spending is also described as flat, and on the consumer side, there is no clear economic driver boosting demand for home improvement. Beyond short term market softness, Sherwin Williams faces broader economic risks. The company operates in more than 120 countries, and changes in global business conditions including inflation, high interest rates, slower industrial production, or disruptions in the supply chain can reduce demand for its products or affect its ability to deliver them efficiently. Specifically, high mortgage rates in the United States continue to impact the housing market, delaying both new home construction and turnover of existing homes. This slows demand for paint and coatings in both new builds and renovation projects. Labor shortages in construction also contribute to project delays and limit short term demand growth. Inflation remains a concern for both consumers and industrial customers, who may delay purchases or scale back projects due to higher costs.

Competition is a risk for Sherwin Williams. The global paints and coatings industry is highly competitive and fragmented, meaning that Sherwin Williams is constantly facing pressure from a wide range of companies, some much larger and others highly specialized. These competitors operate at local, regional, national, and international levels, and they vary widely in size, strategy, and focus. Some of Sherwin Williams’ competitors have stronger positions in specific regions around the world and may have more financial resources or lower operating costs. This allows them to offer better pricing, negotiate more favorable terms with suppliers, or invest more heavily in marketing, product innovation, or customer support. Others are smaller companies that focus on specialized or niche products and can move faster in serving specific customer needs, including growing demand for environmentally friendly coatings. Sherwin Williams competes on several fronts: product quality, innovation, technical expertise, distribution reach, customer service, and pricing. In its Paint Stores Group, it competes not just with other paint companies, but also with home centers, hardware chains, and independent stores. In the Consumer Brands Group, it competes with both branded and private label paint suppliers, many of whom sell through the same retailers. And in the Performance Coatings Group, which serves industrial customers, Sherwin Williams faces both large international rivals and smaller specialized providers. The risk is that if Sherwin Williams cannot keep pace with developments in any of these areas, or if competitors gain an edge through pricing, innovation, sustainability, or distribution, it could lose market share. This would likely lead to lower sales, reduced earnings, and weaker cash flow. Competition could also force Sherwin Williams to spend more on marketing, research, or customer incentives just to defend its position, which could put pressure on profits.

Raw material prices and availability are a risk for Sherwin Williams. The company relies heavily on key raw materials such as resins, solvents, latex, and titanium dioxide to manufacture its paint and coatings. These materials are sourced from suppliers around the world, and their availability and cost are influenced by many factors outside the company’s control. In recent years, Sherwin Williams has experienced both shortages and sharp increases in the cost of raw materials. These spikes were driven by global supply chain disruptions, inflation, plant closures, tariffs on imported materials, and broader geopolitical events. While some raw material prices came down in 2023, the company still faces ongoing pressure from rising costs in certain areas. For example, prices for industrial resins, solvents, packaging, and titanium dioxide have all been trending upward. Natural gas prices are also rising, which adds another layer of cost to production. Adding to the risk is the fact that some of Sherwin Williams’ suppliers are shutting down or reducing capacity, which limits supply and can push prices even higher. In some cases, the company depends on a limited number of suppliers for certain inputs, making it harder to quickly find alternatives if something goes wrong. If Sherwin Williams cannot secure enough raw materials - or has to pay significantly more for them - it could face production delays, higher costs, or quality issues. Even though Sherwin Williams has pricing power, meaning it can often pass on some of these higher costs to customers, there is usually a time lag. If raw material costs rise faster than the company can raise prices, profit margins may suffer in the short term. This can hurt earnings and cash flow. In short, Sherwin Williams operates in a global supply environment that is sensitive to inflation, tariffs, energy prices, geopolitical tension, and supplier actions. Volatility in raw material markets can directly affect how much it costs to make its products, and in turn, impact the company's financial performance.

Reasons to invest

Favorable trends for future housing demand are a reason to invest in Sherwin Williams. Although the housing market has been slow recently due to higher mortgage rates, several long term trends suggest that demand for housing related products, including paint and coatings, is likely to remain strong in the years ahead. First, there is a large and growing amount of pent up demand. Existing home turnover has been low for more than three years, mainly because many homeowners are holding onto their low mortgage rates. But life continues. People are still getting married, having children, and forming new households. Household formation in the United States remains strong, recently exceeding 1,25 million per year. These life changes eventually lead to moves and renovations, even if they are delayed. There are also signs that buyers are starting to adjust to higher interest rates. When mortgage rates recently dipped into the 6 to 6,5 percent range, Sherwin Williams observed a noticeable uptick in existing home sales. This suggests that we may not need rates to fall all the way back to previous lows to see housing activity pick up again. At the same time, the average age of a home in the United States is now around 40 years, which increases the need for maintenance and larger renovation projects. Many homeowners, especially older ones with significant equity, are choosing to stay in their homes and invest in upgrades instead of moving. This supports demand for paint and coatings as part of home improvement work. Another important factor is the housing shortage. Over the past 20 years, the United States has built fewer homes than needed to match population growth and replace aging housing stock. Industry estimates suggest that the country now has a shortfall of nearly 5 million homes. To close that gap and meet future demand, around 1,5 million new homes need to be built each year. However, construction has consistently fallen short of that level. This structural shortage supports long term demand for residential building products. Millennials, the largest generation in United States history, are also entering their prime home buying years. This adds another strong layer of demand, particularly for first time and move up homes. With many homeowners reluctant to sell and few existing homes available, more buyers are expected to turn to newly built homes. That shift increases demand for materials used in construction, including paint.

New stores are a reason to invest in Sherwin Williams. The company plans to open 80 to 100 new stores across the United States and Canada in 2025, which reflects a strong commitment to long term growth and market expansion. This level of store investment is not just about growing for the sake of size, but about building capacity in areas where Sherwin Williams knows there is demand and opportunity to win more business. Most of these new stores are part of the Paint Stores Group, which is the company’s fastest growing and most profitable segment. It serves professional painting contractors and is a major driver of earnings. The company’s own stores are also where it has the most pricing power and the strongest relationships with customers. As this segment grows, it tends to lift overall profitability. The company uses detailed data and forecasting models to decide where to open stores, focusing on areas with increasing customer density and demand. The idea is to open stores in the right locations at the right time so they are positioned to serve both current and future growth. This strategy allows Sherwin Williams to expand its footprint while staying close to where contractors are working. Opening more stores also improves customer service. Contractors often travel between jobs and need convenient access to paint and supplies. A denser store network makes it easier for them to get what they need quickly, which strengthens loyalty and encourages repeat business. Another reason this strategy works is that Sherwin Williams has the people and systems in place to open new stores without stretching itself too thin. The company can adjust staffing and resources at each store based on how much demand there is, which helps keep operations efficient. Employee turnover in the stores is also very low, which means customers are more likely to see familiar faces and receive consistent service.

Building strong partnerships is a reason to invest in Sherwin Williams, especially as a way to position the company for outperformance once macroeconomic conditions improve. While the current environment remains challenging, with high mortgage rates holding back home sales and new construction, Sherwin Williams is not standing still. Instead, it is actively working to deepen its relationships with key players across the housing and retail landscape. The company is partnering closely with residential repaint contractors, national and regional homebuilders, and large retail customers to help them manage through today's affordability challenges. These partnerships go beyond selling products. They focus on delivering value through service, productivity tools, supply chain support, and solutions tailored to each customer's needs. Although the benefits of this approach may not be fully visible right now due to the soft housing market, they are expected to become much more apparent when demand returns. Sherwin Williams has made it clear that it views the current slowdown as temporary. Its leadership emphasizes that it is a question of when, not if, the market rebounds. When that happens, these well established partnerships will likely give Sherwin Williams an advantage in capturing new business and gaining market share. The company is also working to build relationships that will help both Sherwin Williams and its partners grow when the market improves. For example, Sherwin Williams is helping homebuilders deal with rising costs by offering paint and coating options that are easier to manage and more cost effective. This makes it simpler for builders to keep projects affordable. By supporting them in this way now, Sherwin Williams is more likely to be their go to supplier in the future, when construction activity picks up again.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,55, which is from the year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,4% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Sherwin-Williams's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $90,08. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Sherwin-Williams at a price of $45,04 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.153, and capital expenditures were 1.070. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 749 in our calculations. The tax provision was 770. We have 251 outstanding shares. Hence, the calculation will be as follows: (3.153 – 749 + 770) / 251 x 10 = $126,45 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Sherwin-Williams' free cash flow per share at $8,30 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $95,35.

Conclusion

I believe that Sherwin-Williams is an intriguing company with good management. It has built its moat through brand strength, vertical integration, scale, and strong customer relationships. The company has consistently achieved a high ROIC and recorded its highest levels since 2016 in 2023 and 2024, which is encouraging. Free cash flow has not reached previous highs, but this is due to elevated capital expenditures. As spending normalizes in 2026, free cash flow and margins should recover and potentially surpass earlier levels. Macroeconomic factors are a risk because weak housing activity, high mortgage rates, and cautious consumer spending have reduced demand for paint and coatings. Global issues such as inflation, supply chain disruptions, and labor shortages may also delay recovery in key markets. Competition is a risk because Sherwin-Williams faces pressure from both large global rivals and smaller specialized companies that compete on price, innovation, and customer service. Falling behind in areas like product quality or sustainability could lead to lost market share and weaker financial results. Raw material prices and availability are another risk. Sherwin-Williams relies on key inputs like resins, solvents, and titanium dioxide, which are vulnerable to global supply issues, inflation, and geopolitical instability. Rising costs or shortages can squeeze margins and disrupt production. Favorable long-term housing trends support the investment case. Strong household formation, an aging housing stock, and a structural housing shortage in the United States suggest steady demand for both new construction and renovations, which drives sales of paint and coatings. New store openings also support long-term growth. By expanding in high-demand areas through its most profitable segment, the Paint Stores Group, Sherwin-Williams strengthens its reach, pricing power, and customer relationships, factors that contribute to higher earnings over time. Building strong partnerships is another strength. By supporting contractors, homebuilders, and retailers through current challenges, Sherwin-Williams positions itself to gain market share when housing demand recovers. I believe that Sherwin-Williams is a great company, and buying shares at the Ten Cap price of $126 would be a good long-term investment.

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