Streetwise

Lauren Rudd

Sunday, February 19, 2012

An Inherent Distrust of Wall Street

As someone who regularly teaches investment analysis courses, it is often apparent that while the consensus is always to learn how to achieve rates of return that exceed those offered by instruments such as Treasury securities and certificates of deposit, the risk of dealing with Wall Street continues to be a key concern. It is not just an inherent distrust of Wall Street in general, but the concern often embraces a repugnant opinion of those who are purveyors of its products.

That Wall Street has engendered such a paramount level of suspicion is a curse of its own making, a consequence of having gorged itself on the spoils of several financial bubbles, while at the same time decimating the very nest eggs delegated to it for growth and safe keeping.

Tragically, for many it is too late to prevent the victimization perpetrated by those denizens of the financial world that have an uncanny ability to ferret out a combination of ample financial assets and a lack of investment sophistication.

It is unfortunate that the wealth derived from achieving professional success 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 pseudo experts with a supposedly elite understanding of market trends and psychology.

They proffer as evidence a stream of letters after their name, or an association, however tenuous, with a firm or person of some repute, and last but not least, a gratuitous dinner offer.

And while often sufficiently on the side of the law so as to avoid prosecution; the promised returns are rarely forthcoming. Rather an intoxicating idea often degenerates into a situation whereby the invested funds become seriously depleted, illiquid, or possibly lost altogether.

Yet, a cornucopia of quality investments is readily available. For example, consider Sherwin-Williams, the nation’s largest paint manufacturer, known for its slogan that it covers the world. Actually, it does because on a global basis, it is second only to Akzo Nobel.

The company’s vast array of products are sold under such names as Sherwin-Williams, Dutch Boy, Thompson's, and Minwax, with a distribution network of over 3,300 retail stores throughout North America.

When I last wrote about the company a year ago the shares were trading at $84.57. My 12-month projected share price back then was $95 on estimated 2011 earnings of $5.00 per share. The company recently announced its financial results for the year ended December 31, stating that earnings came in at $4.14 per share on a GAAP basis and $4.84 if you add back a one-time charge of $.70 per share related to an IRS settlement.

As a rule, one-time items are not included in analyst estimates. The company’s 2010 earnings were $4.43 per share after one-time charges, yielding a one-year earnings growth rate of 9.3 percent. The shares recently closed at $99.80, well above my estimate, thereby providing for a 12-month capital gain of 18 percent.

Sherwin-Williams’ 2012 guidance indicates first quarter sales increasing between 9 and 14 percent when compared to the same period a year ago, while full-year sales are expected to increase by high single digits to low double digits in terms of percentage. Earnings for the first quarter are projected at $0.56 to $0.74 per shares as compared to $0.63 a year prior. Full-year earnings are expected to come in at between $5.37 and $5.67 per share.

The intrinsic value of the shares using a discounted earnings model is $103 per share, utilizing a five-year analyst average earnings growth rate of 10.9 percent and a discount rate of 12 percent. The more conservative free cash flow to the firm methodology yields an intrinsic value of $154 per share.