Inflation, Tariffs And Debt Will Challenge Performance As Markets Recover

Key Takeaways

• Elevated raw material costs from inflation and tariffs might pressure margins, capturing earnings despite price hikes.
  
• Weak demand in key construction markets and increased interest expenses could constrain revenue and earnings growth.
  
• Strategic investments in growth areas and product innovation position Sherwin-Williams for revenue growth, while strong cash generation enhances shareholder returns.

Catalysts

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

• Sherwin-Williams expects raw material costs to rise due to inflation, tariffs, and supplier capacity issues, which may pressure gross margins despite price increases, limiting potential earnings growth.
  
• Rising interest expenses due to debt refinancing at higher rates and costs associated with financing new headquarters are projected to constrain net earnings growth for the year.
  
• Persistent demand weakness in key markets like new and commercial residential construction suggests that revenue growth might be subdued, as these segments could remain weak until 2026.
  
• Incremental new building expenses related to the company's new headquarters will introduce significant one-time costs in 2025, which will dampen net earnings despite potential sales growth.
  
• A soft DIY consumer market in North America and lack of macroeconomic catalysts signal potential underperformance in the Consumer Brands Group, impacting revenue and net margins.

Sherwin-Williams Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sherwin-Williams compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sherwin-Williams's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.6% today to 13.2% in 3 years time.
• The bearish analysts expect earnings to reach $3.3 billion (and earnings per share of $12.9) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 31.4x today. This future PE is greater than the current PE for the US Chemicals industry at 16.5x.
• 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 6.98%, as per the Simply Wall St company report.

Sherwin-Williams Future Earnings Per Share Growth

Risks

• Sherwin-Williams has achieved strong margin expansion and earnings growth, suggesting resilience in its business model and the ability to maintain healthy profit margins, which could support future earnings.
  
• The company continues to focus on strategic investments in growth areas such as res repaint and coil, as well as product innovation, indicating potential for revenue growth even in a choppy demand environment.
  
• Sherwin-Williams is actively pursuing new account wins and market share gains, particularly in packaging and architectural coatings, which could positively impact sales growth.
  
• The company reported strong cash generation, allowing it to return significant capital to shareholders through share repurchases and dividends, thereby enhancing shareholder returns.
  
• Sherwin-Williams is positioned well to capitalize on future demand improvements and economic stabilization, which may lead to stronger-than-expected revenue and net income growth in the longer term.

Valuation

• The assumed bearish price target for Sherwin-Williams is $328.03, which represents one standard deviation below the consensus price target of $376.67. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $24.5 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $336.25, the bearish analyst price target of $328.03 is 2.5% lower. The relatively low difference between the current share price and the analyst bearish 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.