Who's Afraid Of A Housing Slump?

Not Sherwin-Williams. Despite downturns, the paint giant hasn't had a loss since 1977

Sherwin-Williams dazzles (SHW ) customers with 1,511 paint hues, from "quaint peche" to "rapture blue." But with housing starts projected to plunge at least 20% in 2007, after dropping 13% in 2006, and spending on home remodeling expected to grow by half of last year's 8% increase, you'd think a new color might have to be added to its palette: bottom-line red. The company, after all, makes most of its money by selling paint to builders and do-it-yourselfers through its own chain of 3,000 stores and home-improvement retailers such as Home Depot Inc. (HD )

But Chairman and CEO Christopher M. Connor is far from downbeat on his company's prospects. Connor, 51, predicts another record year, with revenue rising 5% or so, to $8.2 billion, and net income up as much as 10%, to $633 million. The key is the company's geographic and market diversity, which helps mute the impact of a downturn in any one sector or country. "Clearly, we're going to have headwinds," says Connor. "I won't be cavalier. But we've been through housing downturns many times."

Yes, Sherwin-Williams has. The company, which made its debut at 22 on this year's BusinessWeek 50 list of best-performing companies, dates to 1866, when Henry Sherwin spent $2,000 to begin an industrial-goods distributorship. Edward Williams joined four years later. Today the Cleveland-based company has 30,800 employees and operations in 14 countries. Despite repeated down cycles in housing, it hasn't had a loss since 1977 and has boosted its dividend every year since 1979.

Sherwin-Williams Co., owner of the Dutch Boy, Pratt & Lambert, Krylon, and Minwax brands, has a long history of spreading its bets. That falloff in housing starts? It turns out that just 16% of wall-and-ceiling paint sales comes from new-home builders. And sales in other markets, such as commercial construction, are still on the upswing. The company's $600 million automotive-paint division, a steady and higher-margin business that sells primarily to car-repair shops, is also growing fast in the U.S.--and even faster in Latin America. In addition, Sherwin-Williams has gallons of cash for acquisitions and retail expansion, which could push its share of the U.S. paint market beyond its current 40%.


Under Connor, a 24-year company veteran who became CEO in 1999, Sherwin-Williams has been particular about how it spends money. Until last year, when the company opened a paint plant in Fernley, Nev., it had gone 30 years without a new factory. Less than 0.5% of sales is devoted to research and development. Instead, the company uses its bankroll to snap up smaller rivals, such as Duron Inc., which it bought in 2004 for $253 million.

Unlike most of its competitors, Sherwin-Williams is more than a manufacturer. It added 117 stores worldwide in 2006 and plans to open at least 100 more this year, with the goal of eventually hitting 4,000. Having its own stores means the company doesn't have to rely on other retailers to sell its products or offer them incentives for prime shelf space. It also allows Sherwin-Williams to go beyond individual shoppers, who are increasingly anxious about house prices, and deal directly with big contractors.

Connor is now taking this strategy abroad. While Sherwin-Williams has long had outlets in Latin America selling automotive paints, it announced on Apr. 4 that it has entered India's residential paint market with the purchase of Nitco Paints in Mumbai. Any expansion shouldn't strain its pocketbook: Thanks to strong cash flow and a pause in making bigger acquisitions, the company entered 2007 with $469.2 million in cash, vs. $36 million a year ago.

A small step into the huge Indian market isn't enough to keep analysts bullish on the company. Since last July, every ratings change has been a downgrade as analysts watched the stock surpass target prices. But Wall Street's worries don't seem to be rattling many investors. Although Sherwin-Williams' stock is off its February all-time high of 70.95, shares closed at 64.86 on Apr. 17. That's still almost double the price three years ago. Given the company's track record, it sounds like Sherwin-Williams' "halcyon green" and "believable buff" may be the big colors for 2007.

By Michael Arndt

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