It is a given that SHW is severely tied to new housing sales, but given that in recent months this figure has lagged significantly compared to other economic indicators such as retail sales, it will be difficult for SHW to pick up business until the housing industry overall picks up. Unfortunately, housing is also tied to unemployment, which is traditionally a lag factor in the economy.
80% of SHW product is sold through company owned stores at premium prices.
Q4 08 sales will likely show large volume decreases due to 30%+ declines in major markets served; new homes, automotive, and remodeling. Store costs have high fixed cost element -- rent and amort of store improvements. Paint buyers will likely demand more discounting as incentive to buy branded paint, or switch to lower cost generic paint to cut costs.
New Home sales are at 40 year lows. Many consumers and businesses will cut back on paint spending, by deferring routine maintenance, and switch to cheaper paint brands to cut costs. International markets will also slow down, esp. China.
The effect of fewer gallons sold per store, at lower margins, will severely impact net income in 2009 -- and this has not yet been fully discounted as of early January 2009.
Mid year 2009 Price target: $30/Share, for a P/E of 9 on 35% lower earnings.
At the present price of $60/share, the $0.35 quarterly dividend is insufficient to maintain yield support until the stock price declines by 50% to $30/share. Only at $30/share will the yield match that of the broader market higher-dividend payers, such at MO, XOM, and so forth. (We expect financial stock dividends to be sharply reduced, and in many cases eliminated, due to the credit crisis and subsequent bailout, so we do not include these in high payers.)
In fairness, the SHW dividend does not appear to be in great danger of being eliminated, as the present debt structure appears to be manageable, even at reduced sales and profit targets for 2009. If the recession is longer and more severe than generally expected, the dividend may be reduced by 20% in 2010 and again by 20% in 2011. All the market sectors served by SHW show big drops in spending: Housing -- new and remodeled, and US and globally; Industrial construction; and automotive.
