Sherwin-Williams Co.’s Stock Valuation

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Table of Contents

Introduction
Estimation of stock value
Conclusion and recommendations

Introduction

The paper seeks to carry out a stock valuation for Sherwin-Williams Company. It operates in the general building and materials industry. It deals with the production and sale of coatings, paints, and other related products. Sherwin-Williams is a public company that trades on the New York Stock Exchange. The discussion below shows that the overall rating of the company is to sell the stock of Sherwin-Williams Co.

Estimation of stock value

Dividend discount model (DDM)

The model is based on the fact that shareholders expect two forms of returns from their investments. These are the price and dividends. However, the price is also estimated using future streams of dividends. Therefore, the price of the share will be determined using discounted future streams of dividends.

	2009 – 2014	2009 – 2013
Using historical growth rate	-63.11	-135.09
	Average growth rate	Median growth rate
Using estimated growth rate	-11.47	-12.37

Using this approach, four intrinsic values of the share are estimated. The values range between $11.47 to 135.09. The historical growth rate yields higher results than the estimated growth rate. Besides, the intrinsic values between 2009 and 2013 are higher than between 2009 and 2014. The median growth rate yields higher results than the average growth rate. The current market value of the shares is $290.62. This range is higher than the intrinsic value. It shows that the shares are overpriced and the margin of safety is negative. Even though this model is simple and easy to use, it highly depends on the growth rates. Therefore, it might give misleading results when the wrong growth rate is used. This model can work best if the growth rate of the company is equal to or less than the nominal growth rate in the economy.

Two-stage dividend discount model

The model is an extension of the DDM because it allows for the use of two growth rates. The first phase of the model uses a super-normal growth rate while the second phase uses the stable growth rate. In the calculations, the model is used four times to calculate the value of shares.

	1	2	3	4
Years	5	5	10	3
Terminal year	6	6	11	4
Terminal growth rate	3.0%	3.00%	3.00%	3.00%
Super normal growth rate	9.15%	30.35%	9.15%	30.35%
Price	$127.60	$301.98	$164.62	$193.26

The results show that different years and different super-normal growth rates yield different results. As the number of years used in the model increases, the estimated value of the share also increases. This also applies to the growth rate. The range of share prices estimated using this model is $127.60 – $301.98. The current market value of the shares is $290.62. Thus, the results from 1, 3 and 4 show that the shares are overpriced while 2 shows that the shares are underpriced. This model has a number of drawbacks. First, it is hard to estimate the period for the super-normal growth rate. Also, it assumes that the growth rate can swiftly change from a super-normal growth rate to a stable growth rate. This may not be practical in real life. Finally, the model relies on dividends and this makes it unsuitable for companies that do not pay dividends.

Free cash flow to equity

	2014	Adjusted
Free cash flow to equity	1,609	-251
Growth rate (g)	7.09%	7.09%
Cost of capital (k)	5.35%	5.35%
Equity value	-98,800.96	15,383.76
Price per share	-$1,065.35	$165.88

Using the adjusted data, the estimated price is $165.88. The value is lower than the market price (290.62) and it indicates that the shares are overvalued.

P/E multiple

This criterion estimates the market price per share in relation to its earnings.

	P/E	Price
Average high	23.88	143.49
Median high	24.40	125.11
Average low	16.23	97.99
Median low	15.90	79.84

Competitor average	30.15	264.72
Competitor median	29.45	258.57
Price in one year given required return		$303.40

The range of the P/E ratio is 15.90 and 24.40. This implies that the shareholders were willing to pay between 15.90 and 24.40 per dollar of earnings. The P/E ratios for Sherwin-Williams Co. are slightly lower than those of the competitors. This shows that the shareholders of the company should expect slightly lower earnings than those of the competitors. The estimated price is $303.40. This shows that the shares are currently undervalued. The approach depends on the accounting standards that are used by a company. The US GAAP and IFRS may yield different values of earnings per share. Also, inflation can distort the calculations.

Conclusion and recommendations

The results of various models give different results on whether the shares are overvalued or undervalued. However, three out of four of the models show that the shares are overvalued. This implies that they trading at a price higher than the intrinsic value. This can be attributed to growth strategies that are employed by the company. In recent years, the company has been focusing on increasing the number of stores and the market share. The high price of shares that have been reported in recent years can also be attributed to the recovery of the housing market in the US after the global financial crisis. Therefore, an investor should sell the shares because any failure in the company or the economy will cause their values to drop.

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