Thus, moving forward, a potential investor should take this idea into account. We have discovered that Sherwin-Williams has been an exceptionally strong and rewarding company. Moreover, the company might very well benefit greatly from the housing recovery. Yet it is important to keep these ideas in context.
By viewing the estimated earnings and return calculator below, we can observe a solid baseline for how analysts are presently viewing this company. Specifically, 19 analysts reporting to S&P come to a consensus intermediate-term estimated earnings growth rate of 14.4% -- higher than even its historical level. If these estimates materialize as forecast, if the dividend payout ratio remains the same, and if in 5 years Sherwin-Williams is trading at 15 times earnings, this would likely indicate a yearly performance result of about 7% a year. In other words, given the high historical P/E ratio, the performance results would likely trail the business results of the company if the P/E ratio contracted. In fact, for capital appreciation to match the business results of the company, the market would have to place a similar multiple on the company as it is presently.
Overall I believe that Sherwin-Williams is an excellent company and one that should indeed prosper from a continuing housing recovery. However, this is only one side of the story. For the last 15 years Sherwin-Williams has had an average P/E around 15 and has more or less traded around this mark for the better part of the last 15 years. Today, the P/E ratio stands at 25, higher than it has ever been. In order for performance results to match business results one would need the market to continually value the company at such a lofty P/E ratio.
Sherwin-Williams currently appears a bit ahead of itself at today's valuation.
Yet that is not to suggest that reasonable returns might not still be had in the future. It's entirely possible for Sherwin-Williams to grow faster than estimates, increase dividends at a robust rate. It's even possible for the market to repeat its present valuation. Either case would likely enhance the prospective performance results. But personally, I would certainly say that caution is the word. However, as always, I recommend that the reader conduct his or her own thorough due diligence.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.