uploads///Part  Valuations

Sherwin-Williams: Why It’s Trading at a Premium

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Sep. 1 2017, Updated 7:37 a.m. ET

Sherwin-Williams’ forward PE multiple

In the previous part, we analyzed how most of the analysts are tilted towards a “buy” recommendation for Sherwin-Williams (SHW). In this part, we’ll discuss Sherwin-Williams’ valuations compared to its peer. As of August 30, 2017, Sherwin-Williams’ one-year forward PE (price-to-earnings) multiple stood at 20.0x, while its peer PPG Industries’ (PPG) one-year forward PE multiple is 15.80x.

The forward PE multiple is a valuation method that considers future earnings while calculating the valuations. A valuation can be used by investors to compare two or more companies operating in the same industry. Investors can check which company is overvalued and which company is undervalued.

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Sherwin-Williams is trading at a premium

Currently, Sherwin-Williams is trading at a premium compared to its peer PPG Industries. After Sherwin-Williams completed the Valspar acquisition, analysts forecast Sherwin-Williams’ EPS (earnings per share) to be $15.0 for fiscal 2017—an increase of 19.70% compared to fiscal 2016. With Valspar’s integration into Sherwin-Williams, the cost-saving synergy will have a positive impact on Sherwin-Williams’ earnings. As a result, analysts expect Sherwin-Williams’ fiscal 2018 earnings to be $17.90, which implies 19.20% growth compared to fiscal 2017.

PPG Industries’ EPS for fiscal 2017 is expected to be $6.11, which implies 5.50% growth compared to fiscal 2016. PPG Industries is committed to spending $3.5 billion in the next two years on acquisitions and share repurchases. Analysts expect it fiscal 2018 EPS to be $6.83, which implies 11.70% growth compared to its EPS in fiscal 2017. Sherwin-Williams’ EPS growth is better than PPG Industries’ growth. As a result, Sherwin-Williams stock trades at a premium compared to PPG Industries.

Investors can hold Sherwin-Williams indirectly by investing in the First Trust Materials AlphaDEX Fund (FXZ). FXZ has invested 1.8% of its portfolio in Sherwin-Williams. The fund’s other holdings include Westlake Chemical (WLK) and Owens Corning (OC) with weights of 3.80% and 3.60%, respectively, as of August 30, 2017.

In the next part, we’ll discuss how Sherwin-Williams stock has performed in fiscal 2017.

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