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 |
