February 13, 2015

The Sherwin-Williams Company Current Recommendation

OUTPERFORM

Prior Recommendation

Neutral

Date of Last Change

10/14/2014

Current Price (02/12/15)

$283.02

Target Price

$340.00

(SHW-NYSE)

SUMMARY We are maintaining our Outperform recommendation on Sherwin-Williams. Adjusted earnings for fourthquarter 2014 topped the Zacks Consensus Estimate. Revenues rose year over year on higher paint sales volume and contributions from acquisitions, but missed expectations. The company sees encouraging demand trends in the domestic market in 2015. Sherwin-Williams continues to invest in its core Paint Stores Group to boost market share. Moreover, the acquisition of Comex s U.S. and Canadian businesses present a significant opportunity for the company. Sherwin-Williams should also continue to gain from productivity improvement and aggressive cost-control initiatives. Moreover, it continues to generate strong cash flows and remains focused on returning value to its shareholders.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$283.02 $182.35 52.26 0.57 631,884

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

96 $27,170 5.06 75 2

Annual Cash Dividend Dividend Yield (%)

$2.20 0.78

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

9.6 19.2 11.8

P/E using TTM EPS

31.3

P/E using 2015 Estimate

25.2

P/E using 2016 Estimate

22.1

Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page

© 2015 Zacks Investment Research, All Rights reserved.

2 - Buy

Low,

Risk Level * Type of Stock Industry Zacks Industry Rank *

Large-Growth Paints&Rel Prds 16 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

Q1

2013 2014 2015 2016

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2,167 A

2,714 A

2,847 A

2,457 A

10,186 A

2,367 A

3,043 A

3,151 A

2,569 A

11,130 A

2,487 E

3,253 E

3,374 E

2,742 E

11,856 E

12,500 E *Note: Quarterly revenues may not add up to the annual figure due to rounding-off.

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

2013 2014 2015 2016

Q1 (Mar)

Q2 (Jun)

Q3 (Sep)

Q4 (Dec)

Year (Dec)

$1.11 A

$2.56 A

$2.68 A

$1.16 A

$7.49 A

$1.14 A

$3.00 A

$3.39 A

$1.53 A

$9.05 A

$1.42 E

$3.69 E

$4.11 E

$1.99 E

$11.21 E

$12.79 E *Note: Quarterly EPS may not add up to the annual figure due to rounding-off.

Projected EPS Growth - Next 5 Years %

www.Zacks.com

10 S. Riverside Plaza, Chicago IL 60606

10

OVERVIEW Founded in 1866 and headquartered in Cleveland, Ohio, Sherwin-Williams Company is into manufacturing and sales of paints, coatings and related products, primarily in the North and South America. The company also has operations in the Caribbean region, Europe and Asia. Sherwin runs its business under four broad heads Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. The Paint Stores Group: This segment sells Sherwin-Williams branded architectural paints and coatings, industrial and marine products, and original equipment manufacturer product finishes items produced by the other two segments i.e. Consumer Group and Global Finishes Group segments. The Consumer Group: This segment manufactures paints, coatings and related products and sells them primarily in the U.S. and Canada. It also sells paints to the Paint Stores Group. The Group operates 34 manufacturing plants and 10 distribution centers. The segment supplies products to many retail paint and coatings outlets in the U.S. The Consumer Group s products are sold under brands such as Cuprinol, Krylon paints, Purdy paints, Minwax, Dutch Boy, Pratt & Lambert paints, Thompson s WaterSeal wood sealers and Dupli-Color automotive specialty products. The major customers under the segment are particularly retailers in the automotive aftermarket services, industrial and construction supply centers, home centers, independent paint stores and mass merchandisers. The Global Finishes Group: This segment manufactures and sells protective and marine products, refinish products and automotive finishes, and original equipment manufacturer coatings and related products. These products are primarily sold in the markets of North and South America, Europe and Asia. The segment also licenses certain technologies and trade names worldwide, besides distributing Sherwin-Williams branded products through a network of 303 branches. The Latin America Coatings Group: Sherwin-Williams has decided to report the Latin America Coatings Group as a separate segment from the fourth quarter of 2011. The segment manufactures and sells a variety of architectural paint and coatings, protective and marine products, OEM product finishes and related products in North and South America. This segment, which was earlier a part of the Global Finishes Group, has been segregated in order to reflect its rapid growth and also to keep better track of its performance. Sherwin-Williams generated revenues of $11,130 million in 2014 with the Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group accounting for 61%, 13%, 19% and 7%, respectively. Sherwin-Williams, in November 2012, agreed to buy Mexico s leading paint company Consorcio Comex S.A. de C.V. for around $2.34 billion, including debt. However, the company s appeal related to the acquisition of Comex s core Mexican business was denied and the acquisition was declared unauthorized by the Federal Economic Competition Commission (FECC) in Mexico in Nov 2013. Sherwin-Williams, in April 2014, terminated its amended and restated stock purchase deal to buy the Mexico business of Comex. Under the terms of the restated agreement dated Sep 16, 2013, either Sherwin-Williams or Comex had the right to end the deal if it did not consummate on or before Mar 31, 2014.

Equity Research

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REASONS TO BUY Sherwin-Williams philosophy is to diversify its customer base and expand its operations into various geographies. The company follows a method of growing through acquisitions and also through internal initiatives such as efficient working capital management and innovation. This enables the company to somewhat reduce its dependency upon prevailing market conditions. Sherwin-Williams, in Sep 2013, completed its takeover of the U.S. and Canadian businesses of Comex for $90 million in cash and assumed liability of around $75 million. The acquisition has ushered in significant opportunity for Sherwin-Williams. The buyout is a strategic fit for the company and will enable it to better serve its customers across some of its key markets. Sherwin-Williams is making good progress in integrating the acquired business. Sherwin-Williams Consumer segment is recovering with improving domestic and international sales of automotive finishes, original equipment manufacturers product finishes, and protective and marine coatings. The Paint segment has also seen rebound with a favorable mix reversion to professional contractors from the do-it-yourself channel. Paint Stores Group recorded healthy gain in sales in 2013 on higher paint sales volumes and acquisitions. The company is focused on capturing a larger share of its end-markets, as is evident in the increasing number of stores. It added 388 new stores (including 306 stores from Comex acquisition) in 2013 and 95 stores during 2014 in its Paint Stores Group unit and has 4,003 stores currently in operation. Plans are in place to add 100-110 stores in 2015. The company has also launched its HGTV HOME Paints at Lowe s personal stores. Given that Lowe s is well recognized by homeowners in the global home remodeling space, the collaboration with Lowe s should prove beneficial for Sherwin-Williams HGTV HOME solutions. We believe that Sherwin-Williams aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits. The company s working capital ratio dropped to 10.1% of sales at the end of 2014 from 10.5% a year ago. Robust working capital management helped the company to generate healthy cash from operations of $1.08 billion in 2014. Sherwin-Williams is also using its cash strategically. The company returned over $1.7 billion to its shareholders in 2014 through dividends and share repurchases. The company repurchased 6.93 million shares in 2014 and currently has authorization to buyback another 5.23 million shares. Sherwin-Williams also remains committed to increase dividend payouts and raised its quarterly dividend by 10% to $0.55 per share in February 2014. Sherwin-Williams is implementing effective pricing strategies to offset raw material inflation. The company continues to expect incremental benefit from pricing, which may contribute to improvement in gross margin.

RISKS Sherwin-Williams consumer and paint stores businesses still remains impacted by the U.S. economic weakness. Although demand of architectural paint to the commercial market improved recently, it still remains somewhat weak. Moreover, a material recovery is not expected in the nonresidential construction market in the near term. Sherwin-Williams Latin American operations are facing soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar). Currency translation reduced sales from the company s Latin American operations by roughly 13.5% in the most recent quarter. SherwinWilliams is expected to continue to face currency headwind and soft demand in its Latin American markets in the near term. Equity Research

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Sherwin-Williams remains exposed to volatility in raw material costs, primarily for acrylic latex, propylene and titanium dioxide/TiO2 (a key paint pigment).

RECENT NEWS Sherwin-Williams' Q4 Earnings Top Estimates, Profit Rises

January 29, 2015

Sherwin-Williams adjusted earnings rose 34% year over year to $1.53 per share in the fourth quarter of 2014. This came on the back of improved operating results in its Paint Stores, Global Finishes and Consumer Groups. Earnings beat the Zacks Consensus Estimate of $1.36 per share by a wide margin. Including charges of $0.16 per share related to environmental provisions, earnings in the quarter stood at $1.37 per share compared with $1.14 per share earned in the year-ago quarter. Sherwin-Williams recorded net sales of around $2,569.4 million in the fourth quarter, a 4.6% year-overyear rise. Increased paint sales volumes of Sherwin-Williams Paint Stores Group and the favorable impact of acquisitions led to the improvement. However, it fell short of the Zacks Consensus Estimate of $2,607 million. Currency swings had an unfavorable impact of 2.3% in the quarter. Segment Review The Paint Stores Group unit registered net sales of $1.58 billion in the fourth quarter, up 8% from the year-ago quarter. The gain was driven by increased architectural paint sales volumes across all endmarket segments. Net store sales recorded for more than twelve months rose 7.5% from the prior-year quarter. The segment led with higher operating results owing to increased sales volumes. Net sales of the Consumer Group unit rose 1.6% to $276.9 million on the back of acquisitions and higher volume sales made to most of the company s retail customers. The segment improved its operating results through increased sales volumes and operating efficiencies, which were partly offset by operating costs owing to advance of the HGTV HOME by Sherwin-Williams paint program at Lowe's. Net sales from the Global Finishes Group segment went up 1.1% to $502.4 million in the fourth quarter due to higher selling prices and higher paint sales volumes. Unfavorable currency translation reduced sales by 4.1% in the quarter. This group continues to increase its operating margins through improved operating efficiencies and selling prices, partly offset by unfavorable currency translation rate changes. The Latin America Coatings Group s net sales fell 6.7% to $207.4 million as higher selling prices were offset by unfavorable currency translation, which reduced sales by 13.5% and lowered paint sales volumes. This segment experienced higher operating results in the reported quarter owing to the Brazil tax assessments in 2013 and increased selling prices, partly offset by unfavorable currency translation rate changes.

Equity Research

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Fiscal 2014 Performance Full year 2014 adjusted earnings were at $9.05, up 21% year over year and ahead of the Zacks Consensus Estimate of $8.78. This excludes charges of $0.22 related environmental provisions, a loss of $0.18 related to Comex acquisition and a gain of $0.13 from a titanium dioxide settlement. Including these items, earnings stood at $8.78 per share, up 21% from $7.26 in 2013. Sales for full year 2014 were registered as $11.13 billion, up 9.3% from $10.19 billion in 2013. This however missed the Zacks Consensus Estimate of $11.17 billion. Contributions from acquisitions of 3.1% were offset by unfavorable currency impact of 1.4%. Financials and Shareholder Returns Sherwin-Williams working capital ratio as of Dec 31, 2014, was 10.1% compared with 10.5% in the same period last year. The company s net operating cash flow in 2014 was around $1.08 billion. Sherwin-Williams bought back 1.6 million shares through open market purchases in the reported quarter. The company had remaining authorization to repurchase 5.23 million shares as of Dec 31, 2014. Moreover, Sherwin-Williams is financially well positioned for future acquisitions and investments. During 2014, Sherwin-Williams hiked its cash dividend by 10% to $2.20 per common share. Outlook Sherwin-Williams expects consolidated net sales in the first quarter of 2015 to increase in the mid-singledigit percentage range year over year. The company anticipates earnings in the band of $1.30-$1.45 per share versus $1.15 earned in the first quarter of 2014. For full-year 2015, Sherwin-Williams expects consolidated net sales to rise in a high single-digit percentage compared to full-year 2014. Sherwin-Williams predicts net earnings for full-year 2015 in the band of $10.90-$11.10 per share versus $8.78 per share earned in 2014.

Sherwin-Williams' Q3 Earnings Top, Ups FY14 View

October 28, 2014

Sherwin-Williams earnings rose 31.4% year over year to a record $3.35 per share in the third quarter of 2014 from $2.55 per share earned in the year-ago quarter. This came on the back of improved operating results in its Paint Stores, Global Finishes and Consumer Groups. Earnings for the third quarter include an unfavorable impact of $0.01 per share related to acquisitions and $0.03 per share related to currency translation. Barring these, earnings of $3.39 per share surpassed the Zacks Consensus Estimate of $3.18. Sherwin-Williams recorded net sales of around $3,150.6 million in the quarter, a 10.6% year-over-year rise. However, it missed the Zacks Consensus Estimate of $3,152 million. Increased paint sales volumes of Sherwin-Williams Paint Stores Group and the favorable impact of acquisitions led to higher sales in the quarter. Acquisitions contributed 3.3% to the rise in revenues while currency swings had an unfavorable impact of 0.7%.

Equity Research

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Segment Review The Paint Stores Group unit registered net sales of $2.03 billion in the reported quarter, up 15% from the year-ago quarter. The gain was led by increased architectural paint sales volumes across all end-market segments. Acquisitions increased net sales by 4.6%. The group led with higher sales volumes and operating results. Net sales of the Consumer Group unit rose 5% to $385.2 million on the back of acquisitions and higher volume sales to most of the company s retail customers. Acquisitions increased net sales of the segment by 3.9% in the reported quarter. The segment improved its operating results through increased volume sales and operating efficiencies. Net sales from the Global Finishes Group segment went up 5.7% to $536.3 million in the quarter due to higher selling prices and higher paint sales volumes. Unfavorable currency translation reduced sales by 0.4%. This group continues to increase its operating margins through improved operating efficiencies. The Latin America Coatings Group s net sales fell 4% to $200.4 million as higher selling prices were offset by unfavorable currency translation, which reduced sales by 7.8% and lowered paint sales volumes. Financials and Shareholder Return Sherwin-Williams working capital ratio as of Sep 30, 2014, was 10.8% compared with 12.5% in the same period last year. Sherwin-Williams bought back 2 million shares through open market purchases in the reported quarter. The company had remaining authorization to repurchase 6.83 million shares as of Sep 30, 2014. Outlook Sherwin-Williams increased its earnings guidance for 2014 to a range of $8.70 $8.80 per share from $8.50 $8.70 per share, expected previously. The guidance assumes that the Comex acquisition will increase net sales by a low single-digit percentage in the year and negatively impact earnings by $0.28 per share in 2014. For the fourth quarter, Sherwin-Williams expects consolidated net sales to rise 6% 8% year over year. The company expects earnings per share in the range of $1.30 to $1.40 per share. The guidance assumes that the Comex acquisition will decrease earnings per share by $0.10 in the fourth quarter.

Equity Research

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VALUATION Sherwin-Williams current trailing 12-month earnings multiple is 31.3X, which is expensive when compared to the 20.8X average for the peer group and the 19X for the S&P 500. Over the last five years, the company s shares have traded between 15.7X and 30.5X trailing 12-month earnings. The stock is trading at a premium to the peer group and the S&P 500, based on the estimated earnings for 2015 and 2016. Our Outperform recommendation on the stock indicates that it will perform above the broader market. Our price target of $340 is based on 30.3X our 2015 earnings estimate.

Key Indicators

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

P/E 5-Yr High (TTM)

The Sherwin-Williams Company (SHW)

25.2

22.1

10.0

28.8

31.3

30.5

15.7

Industry Average S&P 500

21.8 16.5

18.9 15.4

11.7 10.7

17.2 15.1

20.8 19.0

25.7 19.4

13.6 12.0

21.5 23.4

13.1 12.3

Sealife Corporation (SLIF) Corimon CA (CMNFY) The Valspar Corporation (VAL) 19.1 16.8 11.2 15.1 19.9 RPM International Inc. (RPM) 21.5 18.0 9.7 17.1 22.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/E 5-Yr Low (TTM)

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

The Sherwin-Williams Company (SHW)

19.6

19.6

5.2

58.3

0.8

0.8

20.6

Industry Average S&P 500

8.2 5.3

8.2 9.8

8.2 3.2

32.8 25.5

0.6

66.1 2.1

13.3

Equity Research

EV/EBITDA (TTM)

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SHW. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.3%, Neutral - 76.9%, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Equity Research

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