Completion Of New Headquarters And R&D Center Will Improve Operational Efficiencies

Key Takeaways

• Targeted investments and new account wins are driving above-market sales growth, enhancing revenue and net margins through operating leverage and market share recovery.
  
• Price increases and digital investments counter raw material costs, supporting gross margin expansion, revenue growth, and improved long-term customer relationships.
  
• Sherwin-Williams faces demand uncertainty, rising costs, and exchange rate challenges, which could pressure margins and limit revenue growth.

Catalysts

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

• Sherwin-Williams' targeted investments, particularly in their Paint Stores Group, are expected to drive above-market sales growth, with residential repaint demand showing signs of recovery and providing a significant share gain opportunity. This is likely to positively impact revenue.
  
• The company's new account wins in the Performance Coatings segment, especially in coil and packaging, are anticipated to drive growth. The packaging division has won new accounts and recaptured previously lost share, which should boost revenue and potentially improve net margins due to operating leverage.
  
• Sherwin-Williams is implementing price increases in its Paint Stores Group and other segments, which are expected to counteract raw material cost increases and contribute to gross margin expansion and earnings growth.
  
• Continued investments in digital tools, sales reps, and training are focused on driving share gains and enhancing long-term customer relationships in key markets, which should improve revenue and help maintain or improve net margins.
  
• The completion of new facilities, including the headquarters and R&D center, is expected to enhance operational efficiencies and support product innovation, potentially leading to revenue growth and improved net margins over time.

Sherwin-Williams Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sherwin-Williams's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $14.1) by about March 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 analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 33.9x today. This future PE is greater than the current PE for the US Chemicals industry at 22.1x.
• 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 7.08%, as per the Simply Wall St company report.

Sherwin-Williams Future Earnings Per Share Growth

Risks

• Sherwin-Williams anticipates continued choppiness in the demand environment, with several end markets not expected to improve until 2026, which could impact revenue growth.
  
• The company faces headwinds from rising raw material costs, such as industrial resins and natural gas, which could pressure margins if further price increases are not well-received or sufficient.
  
• Elevated interest expenses related to refinancing debt and new building financing are expected to increase costs, potentially impacting net earnings.
  
• Challenges in the Consumer Brands segment due to soft DIY demand suggest that top-line growth might be limited, affecting overall revenue.
  
• Exchange rate fluctuations, particularly in Latin America and other international markets, are expected to remain a headwind, potentially impacting revenue and operating income.

Valuation

• The analysts have a consensus price target of $384.975 for Sherwin-Williams based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $430.0, and the most bearish reporting a price target of just $247.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $26.4 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $363.62, the analyst price target of $384.98 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.