Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

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 $759.02 per share and the market cap of $67.7 billion, Sherwin-Williams Co stock appears to be significantly overvalued. GF Value for Sherwin-Williams Co is shown in the chart below.


Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued
Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued

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 3.89% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Sherwin-Williams Co has a cash-to-debt ratio of 0.02, which which ranks in the bottom 10% of the companies in Chemicals industry. The overall financial strength of Sherwin-Williams Co is 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:

Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued
Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Sherwin-Williams Co has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $18.4 billion and earnings of $22.06 a share. Its operating margin of 15.54% better than 79% of the companies in Chemicals industry. Overall, GuruFocus ranks Sherwin-Williams Co's profitability as strong. This is the revenue and net income of Sherwin-Williams Co over the past years:

Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued
Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Sherwin-Williams Co is 8.2%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth is 16.9%, which ranks better than 75% 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 13.30, while its WACC came in at 7.16. The historical ROIC vs WACC comparison of Sherwin-Williams Co is shown below:

Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued
Sherwin-Williams Co Stock Shows Every Sign Of Being Significantly Overvalued

In conclusion, the stock of Sherwin-Williams Co (NYSE:SHW, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 75% of the companies in Chemicals industry. To learn more about Sherwin-Williams Co stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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