Is Sherwin-Williams Stock Overvalued At $360?

Sherwin-Williams Co (NYSE: SHW) stock has surged by 18% in the last one year, outperforming the S&P 500, which is up almost 12%. This rally raises a crucial question for investors: Is SHW stock currently overvalued, and could it experience a significant correction, perhaps by 20-25% or even 30% to $250 levels?

Well, here’s the concern – at around $359 per share, SHW stock appears expensive. It’s trading at nearly 28 times its free cash flow over the last twelve months. To put that in perspective, this translates to a paltry cash flow yield of about 3.6%. For context, Nvidia, a leader in the AI sector with over 80% average revenue growth in recent years, trades at a multiple of 50 times cash flow. Sherwin-Williams’ revenue growth, has been much lower at around 5% in the last three years, and at a meager 0.2% in the last twelve months, so it is not enough to justify such a high multiple. What you pay, matters. We have constructed the Trefis High-Quality Portfolio with an eye toward relative valuation. Notably, HQ clocked >91% return since inception and outperformed S&P, Nasdaq, Dow — all of them.

So why is Sherwin-Williams stock so expensive?

Sherwin-Williams’ current valuation stems from its record consolidated net sales of $23.10 billion reported for 2024, driven 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 generated 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.

Furthermore, Sherwin-Williams has continued to expand its retail footprint, adding new stores to capture a larger market share. This expansion, coupled with effective pricing strategies, has contributed to increased sales and margins in key segments. The company has implemented cost-saving initiatives, including supply chain optimization and productivity enhancements, resulting in improved margins. These efforts have enabled Sherwin-Williams to navigate market challenges effectively.

What’s next?

While Sherwin-Williams has maintained a healthy level of operating profitability in the past, the company recently forecast lower-than-expected annual profits, raising red flags about near-term growth. SHW has cited soft demand in key end markets like housing, automotive, and aerospace. Consequently, SHW should be valued more in line with other companies achieving 5% revenue growth. That is, assuming it can sustain even that growth.

Compounding the challenge is the exposure to raw material prices. Paint and coatings production relies heavily on raw materials such as titanium dioxide and petrochemical derivatives. Spikes in these prices can compress margins. SHW may not always be able to pass on higher costs to customers, especially in competitive markets.

Why it may still be OK – and not a time to panic?

SHW is the largest paint and coatings company in the U.S., with a leading position in North America’s professional paint market. It operates over 5,000 company-owned stores, giving it unmatched control over distribution and pricing. Even with cyclical dips, long-term demand for housing, remodeling, and urban development supports SHW’s growth. Additionally aging housing stock in the U.S. creates consistent repaint and maintenance demand.

Investing in a single stock carries inherent risks. On the other hand, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

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