Jefferies says this housing cycle bellwether can rally more than 20%

Published Wed, May 24 20236:08 AM EDTUpdated Wed, May 24 20231:34 PM EDT

It's time to buy shares of Sherwin-Williams , according to Jefferies. Analyst Laurence Alexander upgraded the paint stock to buy from hold and upped his price target by $35 to $275. His new price target implies shares could rally 21.1% over the next year from Tuesday's close. Alexander said the company can be seen as a "bellwether proxy" for investor sentiment on the housing cycle, adding current performance shows Sherwin-Williams outpacing demand about 10% to 15%. "The housing cycle is turning: policy shocks that derail a recovery will likely have a much sharper impact on industrial and consumer goods companies," he said in a note to clients Wednesday. "Top-line benefits from share gains, margin benefits from raw material relief, and disciplined capital allocation should lead to above-trend EPS growth in 2025-2027." SHW YTD mountain SHW YTD The analyst also noted Sherwin-Williams' five-year earnings per share compound annual growth rate over the past two decades has outpaced the S & P 500 about 80% of the time with an average overperformance of 8.3% per year. But he said the company hasn't outperformed the broad index on the metric in the first half of 2023 due to the effects of the Covid-19 pandemic, a winter storm and supply chain dislocations. Alexander said those one-time shocks that weighed on performance are now fading. He said the company should outpace the S & P 500 between 4% and 5% on earrings over the next five years. The upgrade comes as investors worry about a potential economic recession coming later this year. But Sherwin-Williams should perform relatively better than other names during a broader economic slowdown, he said. That's because large caps such as Sherwin-Williams typically outperform smaller names in the cycle. Estimates can compress less than others due to how coatings and other industrial glasses fare in a time of economic contraction. Sherwin-Williams shares have struggled this year, losing more than 4%. — CNBC's Michael Bloom contributed to this report.