Despite a 69% rise since the March 23 lows of this year, and at the current price of around $670 per share, we believe Sherwin-Williams stock (NYSE: SHW) has reached its near term potential based on its historical P/E multiples. The company, which is a global leader in the development, manufacture, and sale of coatings, paints, and related products, has seen its stock rally from $397 to $670 off the recent bottom compared to the S&P which moved around 50%. The stock is leading the overall markets, as investors are positive about the strong demand in the retail segment – architectural DIY paints, which was also evident from the 21% jump in U.S. retailing network sales in the second quarter. Further, the stock is up 15% from the level seen at the end of 2019.
Sherwin-Williams’ stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.
Some of the rise over the last 2 years could be attributed to roughly 20% growth seen in Sherwin-Williams’ revenues from FY 2017 to FY 2019. However, the net income figure decined by 11% over the same period. This drop in net income could be attributed to the one-time income tax benefit in FY 2017 due to the enactment of the U.S Tax Act.
While the company has seen steady revenue growth over FY 2017-19, its P/E multiple has also increased. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 64% Change in Sherwin-Williams Stock Between FY 2017 And Now? has the underlying numbers.
Sherwin-Williams’ P/E multiple changed from around 22x in FY 2017 to close to 35x in FY 2019. While the company’s P/E is just below 40x now, there is a downside when the current P/E is compared to levels seen in the past years – P/E of about 35x at the end of FY 2019 and around 33x at the end of FY 2018.
So what’s the likely trigger and timing for the downside?
Sherwin-Williams is a global paint giant that deals in the development, manufacturing, distribution, and sale of paint, coatings, and related products to professional, industrial, commercial, and retail customers. The company has reported lower revenues in Q1 and Q2 on a year-on-year basis mainly due to lower demand in certain product ranges like performance coatings etc. Further, lockdown restrictions during March, April, and May also contributed to this drop due to the closing down of its store locations. On the other hand, sales have increased in the retail segment (architectural DIY paints for homes), as more and more people have taken on home projects. This was able to offset some of the negative impact of lower revenues in the other units. While the investors are positive about the stock due to growth in the retail segment, we believe that the revenues and earnings for FY 2020 are likely to remain lower than the previous year. This is expected to put pressure on the stock price.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
What if you’re looking for a more balanced portfolio instead? Here’s ahigh quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.