SHW Rises Today, But Is Still Off 52 Week High.

Shares of Sherwin-Williams (SHW) jumped 0.4 % during today's morning session, bringing their 52 week performance to -20.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and positive market sentiment.

The Sherwin-Williams Company develops, manufactures, distributes, and sells paints, coatings, and related products to professional, industrial, commercial, and retail customers. The large-cap Basic Materials company is based in Cleveland, United States and has 61,000 full time employees.

SHW Has a Higher P/E Ratio Than the Sector Average

Compared to the Basic Materials sector's average of 8.57, Sherwin-Williams has a trailing twelve month price to earnings (P/E) ratio of 31.8 and an expected P/E ratio of 23.1. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $7.39 or forward earnings per share of $10.19.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Sherwin-Williams's P/E ratio is higher than its sector average of 8.57, we can deduce that the market is overvaluing the company's earnings.

Sherwin-Williams Is Overvalued in Terms of Expected Growth

Sherwin-Williams's PEG ratio is 2.43. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Sherwin-Williams's case, it tells us the company is overvalued.

SHW Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Sherwin-Williams's P/B ratio of 23.3 is higher than its sector average of 1.86, such a margin of safety does not exist for the stock.

SHW Is Generating Cash

Sherwin-Williams has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 6.3%, compared to 7.4% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 8.1% and a coefficient of variability of 29.2%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 2,245 -372 1,873 -39.69
2020-12-31 3,409 -304 3,105 55.83
2019-12-31 2,321 -329 1,992 n/a

Sherwin-Williams's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Sherwin-Williams's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Sherwin-Williams's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 19,945 11,402 42.83 -9.43
2020-12-31 18,362 9,679 47.29 5.35
2019-12-31 17,901 9,865 44.89 n/a

Sherwin-Williams's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 19,945 5,878 13.36 -14.03
2020-12-31 18,362 5,828 15.54 14.69
2019-12-31 17,901 5,611 13.55 n/a

Sherwin-Williams's cost of revenue is growing at a rate of 8.0% in contrast to 2.4% for operating expenses. Sales revenues, on the other hand, have experienced a 5.6% growth rate. As a result, the average gross margins growth is -2.0 and the average operating margins growth rate is 0.3, with coefficients of variability of 5.0% and 8.5% respectively.

Sherwin-Williams Benefits From Positive Market Signals

The market sentiment regarding Sherwin-Williams is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $300 to $210. SHW is trading -10.12% away from its target price of $261.82. 0.8% of the company's shares are tied to short positions, and 79.0% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 20,799,247 2022-09-29 8% $4,898,638,742
Blackrock Inc. 16,299,036 2022-09-29 6% $3,838,749,028
State Street Corporation 10,299,552 2022-09-29 4% $2,425,750,531
Massachusetts Financial Services Co. 8,485,838 2022-09-29 3% $1,998,584,602
Price (T.Rowe) Associates Inc 8,485,557 2022-09-29 3% $1,998,518,420
FMR, LLC 6,919,933 2022-09-29 3% $1,629,782,649
Capital World Investors 4,459,683 2022-09-29 2% $1,050,344,559
Geode Capital Management, LLC 4,002,266 2022-09-29 2% $942,613,705
Fiera Capital Corporation 3,478,190 2022-09-29 1% $819,183,323
Morgan Stanley 3,432,482 2022-09-29 1% $808,418,175
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.