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Building Sector Up, Which Could Aid Sherwin-Williams

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The building sector moved into the No. 1 spot among 33 sectors in Wednesday's IBD, displacing food and beverage from the pole position.

Should a major index deliver a follow-through, confirming a new uptrend is under way, building might be a better candidate for leadership than the defensive food and beverage sector.

Many stocks in the building sector don't have the greatest foundations for leadership, but IBD research shows that one of every four big market winners are cyclical or turnaround candidates.

Sherwin-Williams ( SHW ), the paint and coatings maker and seller, is an indirect play on the housing industry. It's in the building sector, but it's also a turnaround story.

The paint store group has been a strong performer of late.

The company's annual earnings dropped on a year-ago basis in 2008-09. In 2010-11, EPS grew a moderate 14% and 9%, respectively. However, the Street expects earnings to pop 31% this year.

Quarterly earnings have shown accelerating growth in some of the recent quarters: 7%, 18%, 51% and 31% in the second quarter.

In Q2, after-tax margin was 8.9% -- the best in at least 18 quarters. Pretax margin, though, hasn't fully recovered to the 2006-07 levels. It was 8.6% last year, down for a fourth straight year.

Part of the pressure on margins comes from raw material costs and part from currency exchange.

In the first six months of this year, same-store sales increased 16.6%. (Overall company sales rose 12% in the first six months.)

Currency factors dented sales 3.9% in the first half of this year.

Return on equity, a measure of financial efficiency, was 33.5% last year, the best in at least nine years.

Sherwin-Williams has increased its dividend every year since 1979. The payout has more than doubled since 2004. The annualized yield is 1.2%.

Operating cash flow per share was $6.78 last year. With the dividend only 23% of the cash flow, the company is well-positioned to continue the dividend increases.

In the first six months of this year, the number of funds holding its shares rose from 850 to 900.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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