Saturday, February 25, 2006

SHW- Further Thoughts and Thanks!

A few more thoughts on SHW from others and finally some additional thoughts personally:

Thanks Geoff for linking your many followers to our work and your frequent citations of our efforts in gannononinvesting

As well, thanks go to Ashish Kelkar for mentioning our work in his blog "Show Me the Money."

AK finds the SHW situation intriguing with the irrational rush of capital out the door since the jury's verdict was announced.

David Jackson of Seeking Alpha has been kind enough to ask me to become a contributor to his "dashboard" of stock market blogs. I have agreed and here is our first post on his fine compendium of blogs.

Some analysts have attempted to quantify the lead paint exposure. The CSFB chemicals team reviewed lead paint exposure as it pertains to ICI, the UK domiciled paint manufacturer that owns Glidden. As well, Fitch the bond rating agency concurs: "The financial impact on SHW cannot be determined at this time as the size and extent of the clean-up activity and costs and punitive damages (if any) have not been established."

Lead paint was not barred from production nationwide until 1978, BUT Sherwin-Williams had stopped manufacturing such paint in 1947.

The company withdrew production a full generation before being required to do so...clearly, no good deed goes unpunished.

The liability presumably could only include housing units constructed prior to 1947, roughly about one-quarter of all housing units. Still, nationwide if this case becomes a template, this could be a huge number.

On the positive side, there have been over 100 paint liability trials in 17 states since they commenced in 1987. Over 85% were either dismissed or stuck in appeal following rulings in favor of the defendants. The Rhode Island case is the ONLY one ever to come to trial. For those legally inclined, here is an excellent link to paint litigation.

We do not know the extent of insurance coverage that SHW could access. If the court ruling is appealed to the RI Supreme Court, SHW could be required to post a bond to stay judgment. The company appears to have ample short-term liquidity to meet any reasonable demand: about $1.4 billion in revolving and letters of credit plus access to accounts receivable securitization borrowing of another half a billion.

Enough with the numbers and the litigation history. How washed out is this stock? According to the most recent institutional holdings lists, about 68% of the stock is held institutionally. There are 136.9 million shares outstanding, and since the announcement,about 51 million shares have traded! About 38% of the stock has changed hands, a huge change in ownership. Of course, this does not allow for double counting where day traders may have relished in the volatility. Volume on Friday started to dry up, with only 6 million shares having traded, or as I like to say, changed their minds. Remember, that for every share sold, somebody is buying!

Bottom-line...the legal system in this country permits all sorts of frivolity...pitchers hit by line drives to sue the manufacturers of baseball bats, manufacturers of a plastic cup that somehow was linked to a child's autism, etc,etc. Please check out to really feel ashamed about this tort system. I do not belittle the consequences for children from lead poisoning. But, an industry that voluntarily stops manufacturing a product 30 years before it is required to do so does not seem like a bad corporate citizen somehow. The landlord or more likely, slumlord who failed to paint a wall with safe paint for 30 years seems more culpable to me.

None of us can predict the outcome, the damage, or the ultimate path for SHW. But almost 40% of the sharebase has changed hands, presumably to cooler hands. Clearly, there is huge uncertainty and consequently great risk. I am willing to accept the risk/reward proposition at these prices.


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