Peter Lynch believed you could learn a lot simply walking around a mall, checking out the action and keeping an eye open to opportunities. With that theory in mind, a quick stroll around a local shopping center presented the following revelation. It turns out Behr is owned by Masco Corporation (NYSE:MAS), a Michigan-based company that also happens to own KraftMaid cabinets, often seen on ABC's Extreme Makeover: Home Edition. That's enough for me; let the research begin.

IN PICTURES: 8 Tips For Starting Your Own Business

A Real Estate Slump
New home sales have been drastically hurt by this recession. Only now are stock prices of homebuilders recovering. With the precipitous drop in new home sales came an equally large decline in the revenues and profits of companies serving the industry.

Masco is no different. However, bucking the trend is Masco's paint business (part of Masco's Decorative Architectural Products segment) with second quarter sales that were up 6%, despite the company's overall sales being down 23%, to $2.04 billion. Even better, the segment's operating profit grew 30.3% year-over-year, to $116 million, compared to a 41.2% decline in overall operating profits to $147 million. In the last five years, the paint division's operating profit margin hasn't been less than 18.4%. In the latest quarter, it was 23.0%, 430 basis points higher year-over-year. Behr should trade on its own as Sherwin-Williams (NYSE:SHW) does - it'd fetch a premium price.

Top Paint Brands
Paint Brand Parent Company 2008 Operating Margin
Behr Masco (NYSE:MAS) 18.4%
Olympic PPG Industries (NYSE:PPG) 16.6%
Sherwin-Williams Sherwin Williams (NYSE:SHW) 13.4%
Benjamin Moore Berkshire Hathaway (NYSE:BRK.A) 11.9%
Valspar Valspar (NYSE:VAL) 8.4%

A Painted Picture
The table above lists some of the top brands in the paint war and their respective 2008 operating margins. Behr is at the top of the class with PPG's Olympic, and Pittsburgh Paints next in line at 16.6%. The tough part is, every company reports segments differently. For instance, Benjamin Moore's operating margin is part of "Other Manufacturing" in Berkshire Hathaway's 2008 10-K. Four other companies are a part of this group, which includes Johns Manville, an insulation and roofing business. It's likely that Benjamin Moore's operating margin is actually higher than the rest of the businesses in the group. I'd add a couple percentage points to its operating margin, putting it right alongside Sherwin-Williams. The other number that needs some adjusting is Valspar. Its operating margin is 8.4%. However, this number is actually its 2008 EBIT margin.

Which Stock Should You Buy
That's a tough decision to make. Behr, on its own, would be the obvious choice. However, the rest of the Masco business isn't fairing nearly as well. Masco's business has been deteriorating since 2006, long before the recession hit. If you really want to own a paint company, but aren't sure which is the best, go with Berkshire Hathaway - 'cause you can't go wrong with Warren Buffett. This brings us to PPG and Sherwin-Williams. PPG's paint division probably contributes no more than 75% of the revenues of the Performance Coatings segment, of which it is a part. In 2008, it was $4.7 billion. This means the paint division represents approximately 22% of the overall sales of PPG. Not only are Sherwin-Williams' paint revenues the largest of the five, they also represent the highest percentage of overall sales of the group. You could say that paint means more to Sherwin-Williams.

The Bottom Line
I really like the Behr business, but given Masco's other parts, Sherwin-Williams is the safer bet. Although its second quarter saw a sales decline of 12.7%, its earnings per share (year-over-year) was only off by 10 cents to $1.35. For the full year, it expects an 11-12% drop in sales and earnings per share - between $3.30-3.80. At today's prices, that's a forward P/E of roughly 16.8. Wait to see if we have a correction, so you can buy it below $50. That would give you a greater margin of safety. (To learn more, see Take On Risk With A Margin Of Safety.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  2. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  3. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  10. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center