Post 17. Sherwin-Williams (NYSE: SHW) - Company Note 03

Paint is more interesting than you might expect.

Overview

Sherwin-Williams (NYSE: SHW) is the largest paint and coatings company in the world, with $23B+ in FY24 revenue and a 150+ year operating history. The company develops, manufactures, distributes, and sells a wide range of paints and coatings through a vertically integrated model. Key competitors include: Masco’s Behr (Sold through Home Depot), PPG Industries (NYSE: PPG), Benjamin Moore (owned by Berkshire Hathaway). Sherwin-Williams operates across three business segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group.

As of today (5/30/25), Sherwin-Williams trades at $358.81, implying a market cap of $81.7 billion and a forward P/E multiple of 33.5x, a premium to its 10-year historical average of 29.9x. That’s nearly double the average forward P/E of peers, which sits at 16.5x.

Sherwin-Williams backs up its valuation with consistent financial performance and extremely disciplined capital allocation. Gross margins hover at ~50%, mirroring that of some of the best consumer products and reflecting its immense pricing power and brand strength (I’ll dive into why this is later on). In addition, FCF conversion has averaged above 100% of net income, giving the business flexibility to reinvest in growth, repurchase shares, raise dividends (which they have for the last 46 years), and pursue tuck-in acquisitions. Sherwin-Williams has also managed to consistently deploy these cash flows into attractive growth opportunities, resulting in a >16% 5-yr average ROIC. I’ll come back to these numbers later.

Segment Analysis

1. Paint Stores Group. This is Sherwin’s core business, making up 60%+ of revenue. Operating a DTC model, Sherwin runs 4,700+ company-owned stores across North America that sell directly to professional painters. There’s no middleman. What makes this model so powerful is who they serve. Professionals buy often, value reliability, and care about service. Paint is only ~10% of the average paint project’s total cost, so saving a few dollars doesn’t matter nearly as much as getting the right product on time. That gives Sherwin real pricing power. They’ve also built deep loyalty through strong local support and 3,800+ outside reps who help pros with bids, orders, and delivery. Once you're in Sherwin’s system, few switch.

2. Consumer Brands Group. This segment covers Sherwin-Williams’ paint and coatings sold through retailers like Lowe’s, Ace, and other home centers. It includes well-known brands like Valspar, Minwax, Cabot, and Thompson’s WaterSeal.

3. Performance Coatings Group. This is Sherwin’s industrial coatings segment, which sells into end-markets like autos, aerospace, appliances, furniture, and food and beverage packaging. These markets tend to be more cyclical, so this part of the business can be more volatile than the others. That said, Sherwin has been steadily shifting into more specialized, higher-margin end-markets, like protective coatings and packaging.

Paint is a more interesting business than you might expect.

On the surface, paint probably seems pretty uninteresting. I’ve been spending a lot of time reading about companies in the AI stack, and I honestly didn’t expect a traditional industry like this to grab my attention. But the more I looked into it, the more it surprised me. Paint is actually a pretty attractive business (which explains why we have seen the sector perform so well).

Here are three key reasons, as explained by Tod Basnight, Director of Equity Research at Aureus Asset Management:

1. It’s a recurring expense in an ever-growing market. Square footage globally grows by about 1% per year, and nearly all of it gets painted: homes, commercial buildings, warehouses, data centers. Also, paint isn’t just for looks. It’s a protective coating that wears down over time and needs to be reapplied. That creates steady, recurring demand.

2. It’s a low-cost, high-value home improvement. Painting is one of the cheapest ways to refresh a space, and it makes a visible difference. That makes it more resilient during economic slowdowns—people may put off an expensive kitchen remodel, but they’ll still paint a room. It’s also less interest-rate sensitive than bigger home improvement projects.

3. There is no inventory guessing. Unlike fashion or consumer electronics, paint doesn’t depend on trends. Stores don’t need to stock hundreds of colors—they just keep base paints and mix the exact shade on demand. That keeps inventory lean and lowers the risk of over-ordering or markdowns.

So, why has the stock been such a quiet compounder?

Over the past two decades, Sherwin-Williams has quietly been one of the best-performing stocks in the market, reporting a 10-year Average Annual Shareholder Return of 15.6%.

Figure 1. Sherwin-Williams Stock Chart

To truly understand why the stock has achieved this level of success, we have to look at the fundamentals driving it: a vertically integrated model that captures margin, a customer base that values service over price, and an operating structure that consistently converts earnings into high-return reinvestment.

The company’s true moat is rooted in its distribution model. Rather than relying on intermediaries, Sherwin-Williams operates a fully owned retail network that enables direct relationships with professional customers. This control over the channel has proven powerful: the Sherwin-Williams brand is preferred by contractors over the second-largest competitor, Benjamin Moore, by a ratio of 5:1. It’s not that Sherwin-Williams is providing a radically different quality of paint; they differentiate themselves through service: color accuracy, delivery reliability, and a salesforce of over 3,800+ reps who support customers in bidding, ordering, and fulfillment.

This customer loyalty, combined with the price inelasticity that comes from paint making up less than 10% of a typical project’s total cost, gives Sherwin-Williams meaningful pricing power, a critical competitive advantage that has allowed the company to maintain its industry-leading gross margin despite fluctuations in its raw material COGS.

What makes the story even stronger is how effectively Sherwin-Williams turns earnings into cash. This is largely due to its capital-light model: CapEx typically runs at just ~2% of revenue, and the business benefits from favorable working capital dynamics, with quick inventory turnover and customer payment terms that reduce cash tied up in operations. The result is consistently high free cash flow conversion, which, as mentioned above, averages over 100% of net income over the past five years.

Sherwin-Williams then deploys its free cash flow with discipline. Beyond maintaining its operations, the company has focused on high-impact uses of capital, raising its dividend for 46 consecutive years and opportunistically repurchasing shares. It also pursues selective M&A, most notably its $11.3B acquisition of Valspar in 2017, which expanded its presence in both retail and industrial end-markets.

At the start of the write-up, I mentioned ROIC has averaged over 16% over the past five years. Hopefully, I’ve made it clear how Sherwin-Williams has achieved such a feat.

It’s hard not to point to management as the engine behind everything outlined above. Sherwin-Williams has had just nine CEOs in over 150 years, a level of continuity that speaks to the company’s long-term mindset. The discipline you see in pricing, capital allocation, and customer service all starts at the top.

Zooming out, Sherwin-Williams is a case study in how disciplined execution, thoughtful capital allocation, and control over distribution can quietly deliver decades of outperformance. I hope you enjoyed learning about this space as much as I have.

Wishing everyone a wonderful rest of their Friday night!

Best,

Jack

P.S. I’ve created a more established posting schedule thanks to the recommendation of Matt, the number one, most engaged subscriber. Company Briefs every Friday and another post on Sunday.