Expanding Protective And Marine And Acquiring Suvinil Will Boost Prospects

Key Takeaways

• Expansion in Protective and Marine and strategic acquisitions in Latin America to drive revenue and earnings growth.
  
• Focus on digitization and cost efficiency improvements to enhance net margins and secure new customer relationships.
  
• Sherwin-Williams faces revenue and earnings challenges from demand difficulties, tariff risks, foreign exchange impact, and construction uncertainty, pressuring margins and long-term 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 is expanding its Protective and Marine segment, showing high single-digit growth driven by oil and gas, water and wastewater, performance flooring, and high-value infrastructure projects, which is expected to contribute positively to future revenue.
  
• The company is focusing on further digitization and simplification, which is expected to improve cost efficiencies, thereby positively impacting net margins over time.
  
• Sherwin-Williams announced plans to acquire Suvinil, a market leader in Latin America. This acquisition is expected to create multiple profitable growth opportunities, potentially increasing revenue and earnings once integrated.
  
• The company continues to invest in the strategic opening of 80-100 new stores for the year, which is anticipated to drive additional sales growth and improve long-term revenue streams.
  
• Despite current challenges, Sherwin-Williams is emphasizing its ability to adapt and pivot in choppy markets, with new account wins in various segments that provide a strong position to secure incremental customer relationships, potentially enhancing both revenue and earnings growth.

Sherwin-Williams Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sherwin-Williams's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $14.3) 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 analysts price target, the company would need to trade at a PE ratio of 31.1x on those 2028 earnings, down from 32.5x today. This future PE is greater than the current PE for the US Chemicals industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Sherwin-Williams Future Earnings Per Share Growth

Risks

• Sherwin-Williams is facing a challenging demand environment across multiple segments, which could negatively impact revenue growth and earnings.
  
• The tariff situation is leading to potential increases in raw material costs, which could put pressure on net margins if not offset by price increases.
  
• Consumer Brands Group sales have decreased due to unfavorable foreign exchange rates and soft DIY demand in North America, indicating potential revenue and earnings headwinds in consumer segments.
  
• Performance Coatings Group is experiencing pressure due to softness in heavy equipment demand and negative foreign exchange impacts, which may affect revenue and segment margins.
  
• Continued uncertainty around commercial and property maintenance due to weak construction and postponed capital expenditures could delay recovery and affect long-term revenue projections.

Valuation

• The analysts have a consensus price target of $371.106 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 $420.0, and the most bearish reporting a price target of just $248.43.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $26.5 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 31.1x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $348.13, the analyst price target of $371.11 is 6.2% 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.