Sherwin-Williams Co (NYSE: SHW) stock has increased by 18% over the past year, outperforming the S&P 500, which has risen nearly 12%. This increase prompts an important question for investors: Is SHW stock currently overpriced, and could it face a notable decline, possibly by 20-25% or even 30% down to $250?
Well, here’s the issue – at approximately $359 per share, SHW stock seems costly. It’s trading at almost 28 times its free cash flow from the last twelve months. To provide some context, this equates to a modest cash flow yield of about 3.6%. In comparison, Nvidia, a front-runner in the AI industry with over 80% average revenue growth in recent years, trades at a multiple of 50 times cash flow. In contrast, Sherwin-Williams’ revenue growth has been significantly lower, around 5% over the last three years, and an insignificant 0.2% in the past twelve months, making it challenging to justify such a high multiple. The price you pay is important. We have developed the Trefis High-Quality Portfolio to focus on relative valuation. Notably, HQ has achieved over 91% return since its inception and has outperformed the S&P, Nasdaq, and Dow — all of them.
So why is Sherwin-Williams stock so pricey?
Sherwin-Williams’ current valuation is based on its record consolidated net sales of $23.10 billion reported for 2024, spurred by growth in the Paint Stores Group. Diluted net income per share increased by 14.1% to $10.55, and adjusted EBITDA rose by 6.0% to $4.49 billion. The company also produced strong cash flow, with $3.15 billion in net operating cash, and returned $2.46 billion to shareholders through dividends and share repurchases. See Buy or Fear SHW stock.
Moreover, Sherwin-Williams has consistently expanded its retail presence, opening new stores to capture a larger share of the market. This expansion, along with effective pricing strategies, has bolstered sales and margins in key sectors. The company has undertaken cost-saving measures, including supply chain optimization and productivity improvements, leading to enhanced margins. These initiatives have allowed Sherwin-Williams to manage market difficulties effectively.
What comes next?
While Sherwin-Williams has experienced a healthy level of operational profitability historically, the company has recently projected lower-than-anticipated annual profits, raising concerns about short-term growth. SHW has noted weak demand in significant end markets such as housing, automotive, and aerospace. As a result, SHW should be valued more comparably to other companies achieving 5% revenue growth. That is, if it can even maintain that growth.
Additionally, there is the challenge of raw material price fluctuations. The production of paints and coatings heavily depends on raw materials like titanium dioxide and petrochemical derivatives. Increases in these prices can squeeze margins. SHW may not always have the ability to pass on higher costs to consumers, particularly in competitive markets.
Why it might still be acceptable — and not a time to panic?
SHW is the largest paint and coatings company in the U.S., holding a leading position in North America’s professional paint sector. It operates over 5,000 company-owned stores, affording it unparalleled control over distribution and pricing. Even in cyclical downturns, long-term demand for housing, renovations, and urban development supports SHW’s growth. Furthermore, the aging housing stock in the U.S. generates a constant need for repainting and maintenance.
Investing in a single stock inherently involves risks. Conversely, the Trefis High Quality (HQ) Portfolio, which comprises 30 stocks, has consistently outperformed the S&P 500 over the last four-year period. Why is that? As a collection, HQ Portfolio stocks have yielded better returns with lower risk compared to the benchmark index, resulting in a less volatile experience as demonstrated in HQ Portfolio performance metrics.
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