Companies aren't static entities that hit maturity and simply stop growing. No successful business model calls for a reduction in innovation or a strategy that consists of “just keep doing what we're doing.” Great companies find ways to keep growing and keep building. They challenge themselves to develop new products or services and are never satisfied with the status quo.
Merger and acquisition activity is back on Wall Street – a good sign that the bull is coming back. Companies that are looking to expand look to M&A's as a long play for success. The initial cost can often have a short term temporary negative impact on earnings, but once its complete and overlaps are eliminated, the company can greatly increase its profits.
Some sectors are known for more of this kind of activity than others like technology and healthcare. These industries change so rapidly that a constant turnover is just part of the business model. But when sectors like industrials or retailers start to see that kind of activity, it's a sign that those companies see opportunities for growth on the horizon.
A Company With An Eye Towards The Future
Sherwin-Williams Company (NYSE:SHW) is a $26 billion specialty chemical company primarily engaged in the production and sales of paint for residential, commercial, and industrial usage. The company has operations in North America, South America, and Europe and most recently announced the acquisition of Valspar for $9.3 billion.
The move is an expensive gamble for the well-known paint company. Moody's lowered Sherwin-Williams credit rating from A2 to A3 due to the cost incurred. But it does open up new doors and markets for the company which could result in significant gains down the line if managed correctly. Analysts seemed to applaud the move prompting one upgrade from “neutral” to “positive” and one reiteration of “outperform.”
Let's take a look at the chart.
Chart courtesy of StockCharts.com
The first thing to notice is how the 50-day moving average is about to cross over the 200-day moving average – a bullish sign of growing momentum. This is further evidenced by the positive MACD the stock is showing. And despite recent upward swing, the stock doesn't seem overbought by its RSI rating of 57.40.
The company beat 4th quarter earnings reporting $2.12 versus the analysts estimate of $1.87 per share. The stock is trading at a lower multiple of 25.7 than its industry average of 36. Its long-term growth rate of 24.6% is higher as well compared to 14.3%. The stock comes with a small dividend of 1.20% to help entice investors and protect from downside movement.
The recent purchase of Valspar will likely cost the company some short-term earnings but could provide investors with outsized gains in 12 months time. Short term value of the stock is at around $295 per share, a 5% gain, but with Valspar in its arsenal, this stock could easily rise well above $300.
Check back to see my next post!
Best,
Daniel Cross
INO.com Contributor - Equities
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
