Sherwin-Williams (SHW)

Paint and coating manufacturer Sherwin-Williams (NYSE:SHW) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 1.1% year on year to $5.31 billion. Its non-GAAP profit of $2.25 per share was 4.1% above analysts’ consensus estimates.

Company Overview

Widely known for its success in the paint industry, Sherwin-Williams (NYSE:SHW) is a manufacturer of paints, coatings, and related products.

Traditionally, building materials companies have built competitive advantages with economies of scale, brand recognition, and strong relationships with builders and contractors. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of building materials companies.

Competitors offering similar products include PPG Industries (NYSE:PPG), RPM International (NYSE:RPM), and Axalta Coating Systems (NYSE:AXTA).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Sherwin-Williams’s sales grew at a tepid 5.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Sherwin-Williams’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Sherwin-Williams missed Wall Street’s estimates and reported a rather uninspiring 1.1% year-on-year revenue decline, generating $5.31 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.2% over the next 12 months. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Sherwin-Williams has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 45.6% gross margin over the last five years. Said differently, roughly $45.63 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Sherwin-Williams’s gross profit margin came in at 48.2% this quarter, up 1.1 percentage points year on year. Sherwin-Williams’s full-year margin has also been trending up over the past 12 months, increasing by 1.4 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Sherwin-Williams has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Sherwin-Williams’s operating margin rose by 1.1 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Sherwin-Williams generated an operating profit margin of 14.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sherwin-Williams’s EPS grew at a decent 9.7% compounded annual growth rate over the last five years, higher than its 5.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Sherwin-Williams’s earnings can give us a better understanding of its performance. As we mentioned earlier, Sherwin-Williams’s operating margin was flat this quarter but expanded by 1.1 percentage points over the last five years. On top of that, its share count shrank by 9.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Sherwin-Williams, its two-year annual EPS growth of 11.5% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Sherwin-Williams reported EPS at $2.25, up from $2.17 in the same quarter last year. This print beat analysts’ estimates by 4.1%. Over the next 12 months, Wall Street expects Sherwin-Williams’s full-year EPS of $11.41 to grow 7.6%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Sherwin-Williams has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 7.9% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Sherwin-Williams’s margin dropped by 9 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Sherwin-Williams hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 19.1%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sherwin-Williams’s ROIC averaged 1.9 percentage point increases each year. This is a good sign, and we hope the company can keep improving.

Sherwin-Williams reported $199.8 million of cash and $12.82 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.53 billion of EBITDA over the last 12 months, we view Sherwin-Williams’s 2.8× net-debt-to-EBITDA ratio as safe. We also see its $207.3 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Sherwin-Williams beat analysts’ EBITDA expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed. Overall, this quarter was mixed. The stock traded up 2% to $338.49 immediately after reporting.

Updated: May 16, 2025 at 11:46 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Sherwin-Williams’s business quality ultimately falls short of our standards. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its admirable gross margins indicate the mission-critical nature of its offerings, the downside is its cash profitability fell over the last five years. On top of that, its organic revenue growth has disappointed.

Sherwin-Williams’s P/E ratio based on the next 12 months is 29.6x. This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $377.19 on the company (compared to the current share price of $362.99).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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