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Its historical quarter-on-quarter revenues and earnings verify this statement: …the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters. Sherwin-Williams is an archetype cyclical company, as it has mentioned in its filings: In this section, I will talk about the seasonality of the company and its reinvestments strategy and how they will affect my valuation. Damodaran's Country Default Spreads and Risk Premiums database that he generously shared. In the second column of the calculation above, the Country ERPs are taken from Prof. Sherwin-Williams ERP calculation (Created by author using data from Sherwin-Williams' 10-Q and 10-K filings) The result of the calculation is as follows: In my valuation, I will use the ERP to determine the cost of capital, an important denominator in a DCF valuation.
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I use these numbers to calculate Sherwin-Williams' equity risk premium (ERP), a measure of additional premium over the risk-free rate demanded by investors to invest in the equity market. The last 10-K mentions that about 80% of sales came from the United States, 10% from Asia, and the rest 10% from Europe and the Middle East. What is more important, though, is the regional division of Sherwin-Williams' business. This segment also licenses certain technology and trade names worldwide.Īdministrative: Records the administrative expenses of the company's corporate headquarters site.Īside from Administrative, all three business segments are similar enough that they can be merged into a single industry "Chemical (Specialized)", that I will use for calculating the cost of capital. Performance Coatings Group: Develops and sells industrial coatings worldwide. Paint Stores Group: Company-operated specialty paint stores in the US, Canada, Latin America, and the Caribbean region.Ĭonsumer Group: Product supplier and support for development, manufacturing, distribution, and logistics. Sherwin-Williams has the following business segments: Since it is clearly a mature company, my valuation benefits from the availability of historical data. Company Overviewįounded in 1866, Sherwin-Williams has been around for more than 100 years and has operations in over 120 countries. They are not the focus of this analysis, but since these changes are reflected in the risk-free rates, you may see how they affect the intrinsic value by changing the risk-free rates in the presentation app. Lastly, there are other external factors that could act as potential catalysts for the business like the inflation rate and regulations pertaining to the climate change bill. They are screenshots from the accompanying small presentation web app that I made, which link is available under the last section of this article. Under the Valuation section below, you will also see various possible scenarios and their effects on the intrinsic value.
#SHERWIN WILLIAMS TAKE FIVE FREE#
Aswath Damodaran to calculate the company's Free Cash Flows to Firm. To get the value, I am going to use the discounted cash flow valuation method by Prof. The second adjustment needed is to capitalize R&D expenses but I chose not to do it in this valuation since Sherwin-Williams does not have R&D expenses. This is important because the effect on a company's value is similar between these two. In that spreadsheet, you should see that operating leases are converted into debts. You may view and comment on all the inputs I have used in this Google Spreadsheet document. I will be completely transparent about my valuation process and the inputs I used. In other words, I would buy it at around $268 although it may never reach that price point. I gave this company a "buy" rating since it has about a 5% gap between its current price level and my calculated intrinsic value, but I personally would wait until the gap widens to about 10% to give myself a margin of safety.
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This is especially true if we assume a similar level of after-tax EBIT growth to the company's past 10 years. Were investors being overconfident in this stock? In this piece, you will see that, despite the huge Valspar acquisition in 2017, Sherwin-Williams' intrinsic value is still higher, albeit slightly, than its current stock price. Despite that, the stock rallied about 30% during that period. Its after-tax operating income grew merely 4.52% between Septemand Septem(between 2019-2020, the growth was 17.11%). Jetcityimage/iStock Editorial via Getty Images Investment ThesisĪmidst the rising raw material costs and labor shortages among contractors in 2021, Sherwin-Williams ( NYSE: SHW) showed a stunted growth in its income in that period.
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Sherwin Williams is listed on the NYSE as SHW. Sherwin-Williams retail paint and coating store.