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

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.

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.