Streetwise

Lauren Rudd

Sunday, February 20, 2011

Let Your Investment Cover the Globe

In teaching adults investment analysis, it is readily apparent that while the consensus among the students is always to learn how to achieve rates of return in excess of those offered by Treasury securities or bank CDs that is not the issue of paramount importance.

The key concern is always risk, but not the risk incurred in deciding a specific asset allocation strategy, or which instrument or vehicle is most appropriate. No, it is a pronouncement of an inherent distrust of Wall Street and an abhorrent regard for those who are purveyors of its products.

This curse is one of Wall Street’s own making. The Street has gorged on the spoils of several financial bubbles, the last of which decimated the portfolios of innocent bystanders whose nest eggs were entrusted to the Street for safe keeping. Therefore, it is of little wonder that the issue is not only one of the risk incurred in dealing with the Street but also the trust, or rather lack of it that is of paramount importance. 

For many the classes come too late to ward off their past fate of being among those who have suffered. The less than scrupulous have an uncanny ability to ferret out those possessing the deadly combination of wealth and a lack of investment sophistication.

Wealth derived from achieving professional success in areas such as sports, law, medicine or the entertainment industry, does not bestow a comparable level of investment expertise. Alas, neither does eligibility for Social Security.

To the detriment of the gullible, enviable returns are offered up by supposed experts who claim to have an inside track (they don’t because there is no such thing). They proffer as evidence a stream of letters after their name, and their association, however tenuous, with a firm or person of some repute.

Although skirting the edge of illegality with their promises, those practicing deception often remain sufficiently on the side of the law so as to avoid prosecution. Even in the best of scenarios the promised returns are rarely forthcoming. And more often than not the principal is either seriously depleted or lost altogether.

Yet, competent investing is not difficult. Many companies offer dividends in excess of four percent. Track records of increased earnings and capital appreciation abound, while commission rates as low as $7 per transaction are readily available.

A good place to begin your research is with Sherwin Williams, the nation’s largest paint manufacturer. Undaunted by the recession, it continues to cover the world. On a global basis, it is second only to Akzo Nobel.

Sherwin William’s vast array of products includes a variety of paints and finishes sold under such names as Sherwin-Williams, Dutch Boy, Thompson's, and Minwax in more than 3,300 retail stores throughout North America.

The company recently announced its financial results for the year ended December 31, stating that net sales fell 11.1 percent to $7.09 billion. Currency translation was responsible for about 1.3 percent of that decline.

Net income was also lower for the year, falling 5.5 percent to $3.78 per share on a GAAP basis, as asset impairment charges and a loss on dissolution of a foreign subsidiary reduced the bottom line by approximately 13 cents per share. Acquisitions and currency translation charges took away another 4 cents per share.

On a more positive note, the company’s year-end working capital ratio (accounts receivable plus inventories less accounts payable divided by sales) increased from 10.7 percent to 11.2 percent. At the same time, net operating cash was 12.1 percent of sales, as compared to 11 percent in 2008. The company’s earnings guidance for 2010 is $4.05 to $4.45 per share

A year ago when I wrote about the company, my earnings estimate for 2009 was $3.80 per share, with a projected 12-month share price of $50. The shares recently closed at $64.39, for a 12-month gain of 39 percent.

The intrinsic value of the shares using a discounted earnings model is $72 per share, assuming an earnings growth rate of 10 percent and a discount rate of 15 percent. The more conservative free cash flow to the firm methodology yields an intrinsic value of $71 per share.