Is The Sherwin-Williams Company (NYSE:SHW) Undervalued After Accounting For Its Future Growth?

Growth expectations for The Sherwin-Williams Company (NYSE:SHW) are high, but many investors are starting to ask whether its last close at $510.14 can still be rationalized by the future potential. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

See our latest analysis for Sherwin-Williams

How is SHW going to perform in the future?

The excitement around Sherwin-Williams’s growth potential is not unfounded. Expectations from 25 analysts are extremely bullish with earnings forecasted to rise significantly from today’s level of $12.682 to $24.149 over the next three years. On average, this leads to a growth rate of 19% each year, which indicates an exceedlingly positive future in the near term.

Is SHW’s share price justifiable by its earnings growth?

Sherwin-Williams is looking rather expensive based on its price-to-earnings (PE) ratio of 40.23x. This illustrates that Sherwin-Williams is overvalued compared to the US market average ratio of 18.03x , and overvalued based on current earnings compared to the Chemicals industry average of 18.31x .

NYSE:SHW Price Estimation Relative to Market, July 31st 2019
NYSE:SHW Price Estimation Relative to Market, July 31st 2019

We already know that SHW appears to be overvalued when compared to its industry average. However, seeing as Sherwin-Williams is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 40.23x and expected year-on-year earnings growth of 19% give Sherwin-Williams a quite high PEG ratio of 2.17x. This means that, when we account for Sherwin-Williams’s growth, the stock can be viewed as overvalued , based on fundamental analysis.

What this means for you:

SHW’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are SHW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has SHW been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SHW’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.