Rebound in Housing, Buy This Stock.

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Housing market is rebounding, and it’s a fact known to all. Add the recent stimulus packages across the globe, with QE3,  in a low interest rate environment, and voila, a further boost for the housing recovery is ready. Well if the housing sector is recovering, so should the sectors directly related to it. The industry we’re bullish on is the paints and coatings industry, with Sherwin-Williams as our stock pick.

Sherwin-Williams (NYSE: SHW) is provides general building and construction materials. 75% of its revenues come from the paints and coatings servicing its retail, commercial and industrial customers. The company has a history of over 200 years, and belongs to the Fortune 500 list. The company with a market cap in excess of $15 billion operates with nearly 4000 paint stores and is well diversified geographically with its presence North and South America along with some European countries.

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On taking a look at the 1 year performance charts of Dow Jones US Construction Index along with S&P 500, we can see that the housing industry has been booming.

Due to the housing recovery, the construction spending is hovering at its two year high. This allows building material providers a good opportunity on capitalize on the growth. In addition to this, the prices of raw materials like titanium dioxide have declined significantly from their peaks, which over the year add to the profit margins of Sherwin-Williams.

However, below the peaks doesn’t mean that prices are low.  The prices of raw materials like Titanium dioxide and propylene have increased in the recent past and consolidated at their inflated levels, which are still below their highs in the current year. Any further inflation in the prices of these commodities will have a negative impact on the company's margins, and the recent rally in their prices remains a cause of worry.

The company in its recent quarterly results reported a 9.3% jump in revenues compared to the same period last year. Its EPS rose by 31% which exceeded the market expectations by 21%. Bottomline exceeding expectations, topline increasing at a good pace, sounds like a good stock to me. Sherwin-Williams ended the quarter with $46.6 million of cash reserves.

The company shares its market with Fastenal Company (NASDAQ: FAST) and Vulcan Materials (NYSE: VMC). Looking at the stock performance of all the three competitors of the last year, we can see that Sherwin-Williams is the star performer amongst the three in terms of returns.

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Besides good stock performance investors can also expect stable dividends from Sherwin-Williams. The company yields 1.07% and has been paying dividends since 1978 which have only risen since then. Don’t get alarmed, the payout ratio is below 30%.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>P/S</p> </td> <td> <p>ROE</p> </td> <td> <p>Gross Profit Margin</p> </td> </tr> <tr> <td> <p>Sherwin-Williams</p> </td> <td> <p>1.6</p> </td> <td> <p>34.5%</p> </td> <td> <p>43%</p> </td> </tr> <tr> <td> <p>Fastenal</p> </td> <td> <p>4.2</p> </td> <td> <p>26.8%</p> </td> <td> <p>51.5%</p> </td> </tr> <tr> <td> <p>Vulcan Materials</p> </td> <td> <p>2.3</p> </td> <td> <p>-2.04%</p> </td> <td> <p>12.2%</p> </td> </tr> </tbody> </table>

On comparing the financial metrics we can see that Fastenal Company has the highest gross profit margins, with Sherwin Williams second in line. However Sherwin Williams takes the lead with the lowest P/S ratio and the highest returns on its equity.

Sherwin Williams is well diversified business model revolving around its core competency of providing widely ranging building materials, paints and coatings. The housing sector is rebounding as new constructions increased by 2% and residential spending by nearly 30%. Sherwin Williams is reputable company that has weathered the test of time and economic downturns. We believe that the company will perform in-line with the new infrastructure projects and the investors willing to play the housing rebound should consider going long  Sherwin Williams.

PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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