Over the last six months, Sherwin-Williams’s shares have sunk to $338.99, producing a disappointing 10.3% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Sherwin-Williams, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we don't have much confidence in Sherwin-Williams. Here are three reasons why we avoid SHW and a stock we'd rather own.

Why Is Sherwin-Williams Not Exciting?

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

1. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing Building Materials companies. This metric gives visibility into Sherwin-Williams’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Sherwin-Williams’s organic revenue averaged 2.2% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Sherwin-Williams’s revenue to rise by 2.6%, close to its 2.1% annualized growth for the past two years. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Sherwin-Williams’s margin dropped by 8.4 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Sherwin-Williams’s free cash flow margin for the trailing 12 months was 5.9%.

Final Judgment

Sherwin-Williams isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 27.2× forward price-to-earnings (or $338.99 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

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