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    SHW · NYQ · Basic Materials

    The Sherwin-Williams Company

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 96.76

    Market price

    USD 320.73

    Implied upside

    -69.8%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 3.7% of revenue against depreciation of 2.7%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Current EV/EBITDA of 20.3x sits outside a defensible 3-20x band, so the exit multiple is capped at 20.0x. A multiple that far out usually means EBITDA is the wrong denominator for this business.

    Value Per Share

    Perpetuity growth
    USD 96.76-69.8%
    Exit multiple
    USD 233.62-27.2%
    Market price
    USD 320.73

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn1bn2bnFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayUSD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueUSD 24.1bnUSD 24.6bnUSD 25.1bnUSD 25.6bnUSD 26.2bn+2.1%
    EBITUSD 3.7bnUSD 3.8bnUSD 3.9bnUSD 3.9bnUSD 4.0bn+2.1%
    NOPATUSD 2.9bnUSD 3.0bnUSD 3.1bnUSD 3.1bnUSD 3.2bn+2.1%
    Add depreciation & amortisationUSD 655.7mUSD 669.5mUSD 683.5mUSD 697.9mUSD 712.6m+2.1%
    Less capital expenditureUSD -889.3mUSD -908.0mUSD -927.1mUSD -946.6mUSD -966.5m+2.1%
    Less increase in working capitalUSD -495.2mUSD -505.6mUSD -516.3mUSD -527.1mUSD -538.2m+2.1%
    Free cashflow to firmUSD 2.2bnUSD 2.2bnUSD 2.3bnUSD 2.3bnUSD 2.4bn+2.1%
    Discount factor0.95410.86860.79080.71990.6554-
    Present valueUSD 2.1bnUSD 1.9bnUSD 1.8bnUSD 1.7bnUSD 1.6bn-7.1%
    Present Value Of The ForecastUSD 9.1bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta1.060Reported 1.089, pulled toward 1.0 (Blume)
    Cost of equity10.83%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 77.9bn85.7% of capital
    Total debtUSD 12.9bn14.3% of capital, book value as a proxy
    Tax rate21.0%Effective, capped at statutory
    WACC9.85%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 96.76

    75% of EV

    Forecast FCFF, final year
    USD 2.4bn
    Capex at depreciation, working capital in reinvestment
    USD 3.5bn
    Less reinvestment at g/ROIC (12.4% of NOPAT)
    USD -430.3m
    Capitalised
    USD 3.0bn
    ROIC (reported)
    20.2%
    Terminal value, undiscounted
    USD 42.5bn
    Terminal value, discounted
    USD 27.9bn
    Enterprise value
    USD 37.0bn
    Less net debt
    USD 12.7bn
    Equity value
    USD 24.2bn

    Exit at 20.0x EBITDA

    Value per shareUSD 233.62

    87% of EV

    Terminal value, undiscounted
    USD 94.8bn
    Terminal value, discounted
    USD 62.1bn
    Enterprise value
    USD 71.2bn
    Less net debt
    USD 12.7bn
    Equity value
    USD 58.5bn

    Spread between methods: 83%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    7.85%133.47142.50153.17165.99181.71
    8.85%107.58113.58120.49128.54138.06
    9.85%87.9592.0996.76102.08108.19
    10.85%72.5775.5078.7582.3986.50
    11.85%60.2162.3264.6367.1970.02

    Outlined: this model. Green text: above today's price of 320.73. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year2.1%42.2%+40.1pp
    EBIT margin15.4%38.3%+23.0pp
    Discount rate9.8%5.5%-4.4pp
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    Yahoo Finance and RBA data. General information, not advice. Methodology.