Is Sherwin-Williams a Buffett Stock?

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As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Sherwin-Williams (NYS: SHW) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Sherwin-Williams meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Sherwin-Williams' earnings and free cash flow history:

 

Earnings and free cash flow have remained fairly resilient during the current economic downturn.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-Year Average)

Sherwin-Williams70%30%30%
Ashland (NYS: ASH) 20%8%6%
PPG Industries (NYS: PPG) 87%29%20%
Valspar (NYS: VAL) 82%14%13%

Source: Capital IQ, a division of Standard & Poor's.

Sherwin-Williams' industry tends to employ moderately high leverage, and the company is no exception. It also tends to generate high and superior returns on equity to its peers.

3. Management
CEO Christopher Connor has been at the job since 1999. He's held various other jobs at the company as far back as 1983.

4. Business
Paints aren't particularly susceptible to technological disruption.

The Foolish conclusion
Regardless of whether Buffett would ever buy Sherwin-Williams, we've learned that the company exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward industry.

If you'd like to stay up to speed on the top news and analysis on Sherwin-Williams or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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