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Why Valuations for Sherwin-Williams Are Higher Than Its Peers

Peter Neil - Author

Dec. 6 2016, Updated 8:06 a.m. ET

Sherwin-Williams’s forward PE

Forward PE (price-to-earnings) is a valuation method that considers a company’s future earnings for calculation. As of December 2, 2016, Sherwin-Williams (SHW) was trading at a one-year forward PE multiple of 19.5x compared to its peer PPG Industries (PPG), which is trading at a one-year forward PE multiple of 14.9x.

The forward PE ratio tells how much investors are paying per dollar of expected earnings in the next 12 months. Using a PE ratio, you can compare two or more companies that operate in the same industry and decide which stock is overvalued or undervalued.

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The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important valuation multiple that’s widely used in capital-intensive industries such as the chemical industry. As of December 2, 2016, Sherwin-Williams’s one-year forward EV-to-EBITDA stood at 11.9x, while PPG’s was 10.4x.

Why Sherwin-Williams is trading above its peers

Historically, Sherwin-Williams has been trading at a premium compared to its peer PPG Industries (PPG). In the past six years, Sherwin-Williams’s revenue has risen at a CAGR (compound annual growth rate) of 7.8% compared to PPG’s at 2.7%.

Sherwin-Williams is expanding organically by adding more paint stores. With the acquisition of Valspar (VAL), which is still subject to regulatory approval, SHW revenue is expected to rise to ~$16.0 billion and replace PPG as the number-one coatings company in the world. Sherwin-Williams expects to benefit $280.0 million by 2018 through synergies from the merger.

To invest indirectly in Sherwin-Williams, you can invest in ETFs such as the Guggenheim S&P 500 Equal Weight Materials ETF (RTM) and the PowerShares DWA Industrials Momentum ETF (PRN). These funds have invested 3.5% and 3.1% of their total holdings, respectively, in Sherwin-Williams as of December 2, 2016. RTM’s top holdings include Nucor and FMC (FMC).


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