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Could Sherwin-Williams Continue to Trade at a Premium?

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Updated

Sherwin-Williams’s valuation

The forward PE (price-to-earnings) multiple indicates how much investors would be paying per dollar of expected earnings in the next 12 months. Using PE multiples, investors can compare two or more companies in the same industry and decide whether stocks are overvalued or undervalued.

As of October 12, 2016, Sherwin-Williams was trading at a one-year forward PE multiple of 19.6x. In comparison, peers RPM International (RPM) and PPG Industries (PPG) are trading at one-year forward PE multiples of  16.9x and 14.3x. respectively.

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Enterprise value

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is widely used in capital-intensive industries such as the chemical industry. As of October 12, 2016, Sherwin-Williams’s one-year forward EV-to-EBITDA was 11.4x, while RPM’s and PPG’s multiples were 8.4x and 9.8x.

Why is Sherwin-Williams trading above peers?

Historically, Sherwin-Williams has been trading at a premium to peers RPM International and PPG Industries. In the past six years, Sherwin-Williams’s revenue has grown at a compound annual growth rate (or CAGR) of 7.8%, compared with RPM’s CAGR of  7.3% and PPG’s CAGR of 2.7%. Sherwin-Williams is expanding organically by adding more paint stores. Also, with the acquisition of Valspar (VAL), subject to regulatory approval, the SHW’s revenue is expected to grow to ~$16 billion and replace PPG as the largest coatings company in the world. Also, Sherwin-Williams expects $280 million by 2018 through synergy from the merger.

Investors can invest in the Guggenheim S&P 500 Equal Weight Materials ETF (RTM) for exposure to Sherwin-Williams. The fund had invested 3.6% of its total holdings in Sherwin-Williams as of October 12, 2016.

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