Sherwin-Williams: Painting the Wonder of Compounding Decade After Decade

You can listen to this Deep Dive here

When much of the Silicon Valley or broader tech world is currently under the spell of  the magic of of Generative AI or ChatGPT, it may be somewhat monotonous to study a company that was founded in 1866 in Cleveland, Ohio. Some may even wonder it might be more fun to watch paint dry than studying a paint business! Personally, it was, in fact, the opposite. Sherwin Williams is perhaps my favorite Deep Dive in 2022.  

You would probably be surprised how much shareholder wealth was created in the public markets across the world by this "boring" industry. Over the last 20 years, S&P 500 and NASDAQ 100 became ~5x and ~11x respectively. Here's how some of the successful paint companies fared around the world during this timeframe i.e. 20 years:

Sherwin Williams: ~34x or ~20% CAGR
PPG Industries: ~8x or ~12% CAGR
Asian Paints (India): ~182x or ~30% CAGR
Berger Paints (India): ~389x or ~35% CAGR
Berger Paints (Nigeria): ~8x or ~12% CAGR

Source: KoyFin (5 December, 2022) *Data available since 1968, therefore actual "since IPO return" is different than shown for Sherwin Williams and PPG

Basically, most of the players in this industry have outperformed S&P 500 over the last 20 years, some clearly more so than others! For companies to generate massive shareholder wealth, they don't necessarily need to invent airplanes, automobiles, or any mind bending innovation. Sometimes, all it may require is selling products in a consolidated industry that is staple of society.

Of course, there is much more to the Sherwin Williams story and how/why they have compounded over the decades.

Here's the outline for this month's Deep Dive:

Section 1 Sherwin Williams Business Model: Sherwin Williams' three operating segments are dissected in this section. Unit economics of the stores, industry/macro factors, as well as margin structure of each of the operating segments are highlighted here.

Section 2 Competitive Dynamics: While the competitors vary by region, I primarily focused on the rivalry between Sherwin Williams and PPG Industries. While these companies seem to be diverging in strategic direction, I discussed why I think Sherwin Williams is likely making the right decision.

Section 3 Capital Allocation: Even though both PPG and Sherwin Williams generated a lot of shareholder wealth over the decades, I documented how Sherwin Williams' capital allocation strategy helped outperform PPG.

Section 4 Management and Incentives: Sherwin Williams' management and incentive structure is discussed in this section.

Section 5 Valuation and Model Assumptions: Model/implied expectations are discussed here. I also elaborated on my framework for terminal value multiples which is a frequent question I receive from subscribers.

Section 6 Final Words: Concluding remarks on Sherwin Williams, and disclosure of my overall portfolio.

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