The stock of Sherwin-Williams Co (NYSE:SHW, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $277.41 per share and the market cap of $73.8 billion, Sherwin-Williams Co stock is believed to be significantly overvalued. GF Value for Sherwin-Williams Co is shown in the chart below.
Because Sherwin-Williams Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.2% over the past three years and is estimated to grow 4.78% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Sherwin-Williams Co has a cash-to-debt ratio of 0.03, which is in the bottom 10% of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of Sherwin-Williams Co at 4 out of 10, which indicates that the financial strength of Sherwin-Williams Co is poor. This is the debt and cash of Sherwin-Williams Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Sherwin-Williams Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $18.9 billion and earnings of $7.71 a share. Its operating margin is 16.20%, which ranks better than 78% of the companies in Chemicals industry. Overall, the profitability of Sherwin-Williams Co is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Sherwin-Williams Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Sherwin-Williams Co is 8.2%, which ranks better than 74% of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 16.9%, which ranks better than 73% of the companies in Chemicals industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Sherwin-Williams Co’s ROIC was 14.19, while its WACC came in at 7.05. The historical ROIC vs WACC comparison of Sherwin-Williams Co is shown below:
To conclude, The stock of Sherwin-Williams Co (NYSE:SHW, 30-year Financials) appears to be significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 73% of the companies in Chemicals industry. To learn more about Sherwin-Williams Co stock, you can check out its 30-year Financials here.
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