83: Initial Thoughts On Sherwin-Williams (SHW)
Now that's a really old auditor
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Cover The Earth!
I’m currently working on the September issue of Watchlist Deep Dives, which features Sherwin-Williams.
My research process is primary-sources focused and that means reading lots of 10K’s, which include a report from the company’s auditors. I was surprised to see that Ernst & Young had served as SHW’s auditor since 1908. Now, SHW was founded in 1866, so the company and its auditor have had some time apart. But 114 years as auditor?!
Clearly, the same individuals haven’t been auditing SHW for that time. But it does raise the “Enron” question. Should a company switch audit firms from time to time to maintain independence? Or is it enough that teams within the audit firm change from time to time? I don’t know the right answer. What do you think?
Initial Findings/Thoughts on SHW
SHW is the dominant player in the architectural paint market, both worldwide and in North America. The NA is more relevant and where it is strongest, with a 28% market share. The US alone used 868 million gallons of paint to protect homes and offices last year. That’s a boatload of paint. Correction, that’s enough paint to float a boat.
What I like about SHW is the economics of the industry. Specifically the paint contractor industry. SHW focuses on professional contractors who make up 61% of the market.
The largest expense for a paint contractor is not the paint itself, but labor. Labor comprises a whopping 90% of total costs for the typical paint contractor. That means the 10% spent on paint has a disproportionately lower impact on cost.
But — and here’s the great part — the quality of the paint has a disproportionate impact on the final job. That gives SHW pricing power. The company uses its ability to command higher prices (and profits) and puts some of it back into better R&D, customer service, etc., in a virtuous cycle.
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Stay rational! —Adam
