Why Cleveland paint company Sherwin-Williams is on pace to become a $10 billion company

"I think this year is shaping up to be another record year for them in terms of earnings," said Ivan Marcuse, an equity research analyst at KeyBanc Capital Markets Inc. "Look at the housing data that keeps coming out. Building projects are up 14.5 percent year over year, existing home sales and building permits are up, and the overall construction industry continues to move in a positive direction."

BRECKSVILLE, Ohio -- Cleveland grown Sherwin-Williams paint company is climbing to new heights thanks to soaring consumer confidence, a robust housing recovery, and more fashion-conscious homeowners who like repainting their homes.

According to Chris Connor, chairman and chief executive of Sherwin-Williams Co., those elements are contributing to the brisk increase in customers and purchases at the company's 3,520 neighborhood paint stores.

The Fortune 500 company is on pace to mark its third straight year of record sales and profits and become a $10 billion company.

Sherwin-Williams' shares on the New York Stock Exchange have more than doubled in price since the beginning of 2012, from $91 then to $188.53 on Friday.

And that doesn't take into account the Cleveland company's $2.34 billion acquisition of major Mexican rival Consorcio Comex, a 61-year-old, family-owned paint retailer with 3,618 stores in North America. That transaction, awaiting the blessing of the Mexican government, is expected to close any day now.

A generation ago, the most popular interior colors were white, off-white, eggshell, antique white, and linen, Connor said, counting off the shades on his fingers.

But now, not only can homeowners find house paints in nearly every hue imaginable, they can change their minds as often as they like.

"We never underestimate the will of the women of America to change their minds," Connor joked.

All of which paints a much brighter picture for the 147-year-old company than what Connor was looking at earlier this year.

When brutal winter temperatures kept homeowners and professional paint contractors indoors, he kept thinking about how this year's financials were going to pale in comparison with last year's record highs, when an unusually warm and sunny spring ushered in an early start to the do-it-yourself season.

"We were selling outside house paint in February (2012), remember?" he marveled, during a recent visit to a Sherwin-Williams paint store in Brecksville.

Instead, the first quarter of 2013 turned out better than expected, with profits up 16.8 percent to $116.2 million.

So rather than having to explain how the company got hammered by cold weather, Connor got to tell analysts how raw material costs seem to be stabilizing and sales hit an all-time high of $2.17 billion for the quarter.

Even better, on the housing front, "the majority of the data still points to a robust and sustainable recovery," Connor said. The news sent shares to another new 52-week high of $174.88 on April 18, 2013.

View full sizeAll the paint in Sherwin-Williams'€™ 3,796 stores worldwide arrives as a white base, to which pigments are added in computer-controlled amounts to get the exact shade the customer desires. Sherwin-Williams predicts that one of this year'€™s most popular colors will be aloe, and its many shades of cool mint green. Lisa DeJong, The Plain Dealer 

Ivy Zelman, a veteran homebuilding and building products equity research analyst and chief executive of Zelman & Associates, with offices in Cleveland, New York and Boston, has been bullish on the company for years. She said that the factors driving Sherwin-Williams' performance are many and multi-faceted.

One clear advantage, however, is the company's 14 years of "leadership under Chris Connor, who has been maximizing shareholder value and consistently delivering results," she said. "And the word 'consistently' is very critical, because not a lot of companies can show consistent results.

"His leadership style is a real teamwork environment. He's well-spoken and gets people excited about what they're doing. He can really deliver. Look at Comex. He's been chasing that company for 10 years," she said.

"His door is always open, he answers his own phone, and he's such an affable guy. I would say that Chris Connor is the best CEO" of all the companies she covers, she added.

Equity research analyst Ivan Marcuse, a vice president of KeyBanc Capital Markets Inc. in Cleveland, also expects big things from Sherwin-Williams, the nation's largest seller of architectural paint.

"I think this year is shaping up to be another record year for them in terms of earnings," he said. "Look at the housing data that keeps coming out. Building projects are up 14.5 percent year over year, existing home sales and building permits are up, and the overall construction industry continues to move in a positive direction."

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The National Association of Home Builders expects single-family housing starts to grow 23 percent this year, to 672,000, according to Sageworks Inc., a Raleigh, N.C., company that tracks data on private companies.

"In addition to benefiting from stronger new home sales, general contractors might also be seeing more confident homeowners who are now more likely to start a major renovation project than they were a few years ago," Sageworks analyst Brad Schaefer said.

In May, the Consumer Confidence Index rose to a five-year-high of 76.2, as consumers surveyed expressed optimism about business conditions, the economy and job prospects.

That bodes well for the professional painters and contractors who comprise about 85 percent of Sherwin-Williams' retail customers (the other 15 percent are homeowners and do-it-yourselfers).

Room to Grow

Mary Pisnar, an associate professor of business administration at Baldwin Wallace University in Berea, said she isn't at all surprised that the company is faring so well.

"First of all, they have an amazing culture," she said. "It's one of the few companies that actually likes building talent internally. It isn't unusual to find employees that have been there 25 to 30 years, who've worked their way up."

That includes Connor himself, who joined the company as director of advertising about 30 years ago and is only the eighth CEO in the company's 147-year history.

Pisnar said Sherwin's culture has contributed to a workplace that's also very innovative about creating new products, which has contributed to the range of products the company sells.

Unlike department stores and general merchandise bricks-and-mortar stores, Sherwin-Williams is more of a specialty retailer with room to grow. Marcuse, the Cleveland analyst, pointed out that the company continued to open stores even during the housing downturn, putting it in an even better position to benefit from the recovery.

"Painting a room is relatively cheap and effective way to make a change in a house" and improve its value, he said. For homeowners cutting back on other kinds of redecorating, "painting is typically an easy, satisfying way to do that."

Repainting every three years

Not only does Sherwin-Williams staff more stores than its 20 closest competitors combined, but it also offers services its rivals don't. Homeowners who buy a $75 Sherwin-Williams gift card can get a 90-minute consultation with an interior design and color consultant in their own homes. They can then use the $75 gift card for future purchases.

Natalie Simmons, one of 19 decorative product specialists in the Greater Cleveland region, uses what she's picked up from the world of fashion and interior design to help homeowners pick out their colors based on a favorite bedspread or other personal touches. Those who are indecisive can take home small containers of several hues to try out on their walls before they buy in bulk.

"How important is going to the store and having that relationship with the contractor?" she asked.

Services like that aim to grab market share from big-box competitors and make the company's paint stores less intimidating to consumers. They have also helped boost sales directly to homeowners to nearly the same percentage as sales to its bread-and-butter customers, the professional contractors, said Liesl Macke, store manager of the Brecksville store.

Carmen Cyr, city manager of Sherwin's east district of Cleveland, said the company is not only opening locations, it is renovating existing stores to make them more inviting, especially to the women who often make decorating and painting decisions.

Thanks to HGTV and hit TV shows like "Extreme Makeover Home Edition," the frequency with which homeowners repaint their homes has dropped from seven to three years, Simmons said.

But Pisnar said the stores could still do more to be more welcoming and spark new ideas. She said the company's self-help website is consumer-friendly, but that it's not translating to the store level.

"It seems to me that they've taken out the clutter, but really, that's about it," she said of a store she recently visited. "There isn't much to browse through."

"If they can target the right demographic areas with high incomes and greater availability of contractors," she said Sherwin-Williams can make its newer stores even more profitable.

"Paint will go a long way"

Elad Granot, a marketing professor and director of the MBA programs at the Monte Ahuja College of Business at Cleveland State University, said it's easy to understand why a Baird Equity Research analyst just upgraded the company to "Outperform," meaning business is likely to fare better than people expect.

"I think the outlook for 2013 is very bright," he said. "In terms of bang for the buck, paint will go a long way. You could make energy efficient modifications to your home, but no one can see them."

He said that after years of watching one of its key paint ingredients soar in price, Sherwin-Williams is seeing titanium oxide finally settling down in price. "Now there's an oversupply of titanium oxide and DuPont, the world's biggest producer, was downgraded on their stock because there's so much," he said.

Sherwin-Williams' lesser-known automotive finishes division is also improving, because auto manufacturers are doing exceptionally well, he added.

And both automotive finishes and architectural paint sales are likely to benefit from the company's expansion into Mexico and other developing countries where middle class consumers are getting more affluent and brand-conscious, he said.

View full sizeAlthough Sherwin-Williams customers won'€™t notice much difference in the stores after the company buys its Mexican competitor, Consorcio Comex, shoppers at Comex paint stores in Mexico will start seeing more Sherwin-Williams brands and products on their shelves. Lisa DeJong, The Plain Dealer

Comex is the Sherwin-Williams of Mexico

Connor said the 60-year-old "Comex" brand in Mexico has the same kind of name recognition that Sherwin-Williams has here in the U.S. and Canada, with a slightly larger market share. So the company has no plans to rename its stores south of the border after the acquisition.

Instead, Sherwin plans to upgrade the Comex stores from the inside, by expanding the varieties of paint they sell and upgrading things like paint brushes. Connor pulled a couple brushes off the wall and fanned the bristles with his thumb to show how much finer and easier-to-control brushes are here compared to what's available there.

Unlike in the U.S., Comex stores are more densely packed into the same neighborhoods, with 3,600 stores serving a Mexican population of 112 million, versus the 3,520 Sherwin-Williams stores serving 314 million here in the U.S. That means, in some places, having three or four Comex stores on the same block, each catering to a wider range of customer needs than the stores here.

Labor is also less expensive, making it cheaper for someone to buy the paint and hire someone else to do the work, Connor said. He said the company also plans to expand its industrial coatings and automotive paints throughout Mexico.

Pisnar, the Baldwin Wallace professor, said that while Mexico and other developing nations present opportunities for growth, Sherwin-Williams' leaders need to be savvy about where they expand, "because the paint market is not the same around the globe."

"They need to look at how Comex runs its store, the cost of labor and how strong the contracting business is in each of their markets," she said. She points to the time when Sherwin-Williams expanded into India without factoring in the country's cheap cost of labor.

"Paint stores are still very much focused on the contractor side of the industry," she said. "They need to figure out marketing to the homeowner, especially the homemakers making the decorating decisions."

5,000 stores

Connor said Sherwin-Williams is still planning on expanding its store count, even after the merger, to 5,000 stores in the U.S. and Canada.

At its current pace of 80 to 100 new stores a year, plus about 300 from the Comex acquisition, "that's 1,100 stores to go and 13 to 15 years to do it," he said.

"Every four days, somewhere in America, a Sherwin-Williams store opens."

Zelman said that if Sherwin-Williams believes 5,000 is the right number, "then I believe it, too."

"Building a company of this stature doesn't happen overnight. It really does come down to the person at the top," she said.

One thing Zelman says she's learned about the company over the years is that "the kite just doesn't fly high enough for them. With Chris Connor believing in their opportunity and potential, there's always room to achieve more."