I Will Use 5% Pricing And Repaint Demand For Success

Key Takeaways

• Revenue growth is expected from residential repaint demand recovery and strategic pricing increases.
  
• Investments in innovation, key account wins, and supply chain simplification aim to boost sales and enhance gross margins.
  
• Persistent demand challenges, rising costs, and competitive pricing may constrain Sherwin-Williams' growth and profitability amidst market and operational pressures.

Catalysts

Engages in the development, manufacture, distribution, and sale of paint, coatings, and related products to professional, industrial, commercial and retail customers.

• Sherwin-Williams is focusing on residential repaint demand, a significant share gain opportunity, as existing home sales begin to show modest recovery, which could lead to enhanced revenue growth.
  
• The rollout of a 5% price increase in the Paint Stores Group and targeted price hikes in other segments are expected to improve gross margins and support revenue growth through enhanced pricing strategies.
  
• Strategic investments in product innovation and major account wins in coil and packaging, along with the transition to non-BPA coatings, are projected to drive incremental sales and aid gross margins leading up to 2026.
  
• The company's ongoing supply chain simplification efforts, alongside anticipated gross margin expansion even with low single-digit raw material cost increases, reflect an operational focus likely to support earnings growth.
  
• Planned opening of 80 to 100 new stores and continued sales representative hires highlight anticipated volume growth that could significantly contribute to revenue expansion if effectively executed, particularly in high-growth markets.

Sherwin-Williams Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Sherwin-Williams compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Sherwin-Williams's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.6% today to 14.2% in 3 years time.
• The bullish analysts expect earnings to reach $3.9 billion (and earnings per share of $15.77) by about April 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, up from 31.0x today. This future PE is greater than the current PE for the US Chemicals industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 1.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Sherwin-Williams Future Earnings Per Share Growth

Risks

• Persistent choppy demand environment with little improvement expected until potentially 2026 may limit revenue growth and impact the ability to capture market share gains effectively.
  
• Unfavorable foreign exchange rates and tariff impacts, particularly related to Asian imports, could increase raw material costs and pressure Sherwin-Williams' gross margins.
  
• Increased operating expenses, including $80 million for new headquarters, alongside higher interest expenses due to debt refinancing at higher rates, could constrain net earnings growth.
  
• Slowing new residential construction and continued softness in commercial and property maintenance markets might hinder sales growth in key segments.
  
• Competitive pricing dynamics could potentially affect the company’s ability to implement and sustain price increases, influencing overall revenue and profit margins.

Valuation

• The assumed bullish price target for Sherwin-Williams is $420.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sherwin-Williams's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $420.0, and the most bearish reporting a price target of just $247.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $27.1 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $331.96, the bullish analyst price target of $420.0 is 21.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.