Finance

Critical Comparison: The Sherwin-Williams Company (SHW) vs. Enable Midstream Partners, LP (ENBL)

The Sherwin-Williams Company (NYSE:SHW) shares are down more than -3.39% this year and recently decreased -1.56% or -$6.29 to settle at $396.15. Enable Midstream Partners, LP (NYSE:ENBL), on the other hand, is up 18.85% year to date as of 06/13/2018. It currently trades at $16.90 and has returned 0.60% during the past week.

The Sherwin-Williams Company (NYSE:SHW) and Enable Midstream Partners, LP (NYSE:ENBL) are the two most active stocks in the Specialty Chemicals industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SHW to grow earnings at a 15.28% annual rate over the next 5 years. Comparatively, ENBL is expected to grow at a 9.45% annual rate. All else equal, SHW’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 32.2% for Enable Midstream Partners, LP (ENBL). SHW’s ROI is 10.20% while ENBL has a ROI of 4.90%. The interpretation is that SHW’s business generates a higher return on investment than ENBL’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. SHW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.86. Comparatively, ENBL’s free cash flow per share was -0.38. On a percent-of-sales basis, SHW’s free cash flow was -0.54% while ENBL converted -5.87% of its revenues into cash flow. This means that, for a given level of sales, SHW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. SHW has a current ratio of 1.10 compared to 0.30 for ENBL. This means that SHW can more easily cover its most immediate liabilities over the next twelve months. SHW’s debt-to-equity ratio is 2.93 versus a D/E of 0.50 for ENBL. SHW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SHW trades at a forward P/E of 18.07, a P/B of 10.02, and a P/S of 2.27, compared to a forward P/E of 16.62, a P/B of 1.01, and a P/S of 2.59 for ENBL. SHW is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. SHW is currently priced at a -11.1% to its one-year price target of 445.61. Comparatively, ENBL is -1.63% relative to its price target of 17.18. This suggests that SHW is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SHW has a beta of 1.15 and ENBL’s beta is 1.81. SHW’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. SHW has a short ratio of 3.00 compared to a short interest of 3.23 for ENBL. This implies that the market is currently less bearish on the outlook for SHW.

Summary

The Sherwin-Williams Company (NYSE:SHW) beats Enable Midstream Partners, LP (NYSE:ENBL) on a total of 9 of the 14 factors compared between the two stocks. SHW is growing fastly, generates a higher return on investment, has a higher cash conversion rate and higher liquidity. SHW is more undervalued relative to its price target. Finally, SHW has better sentiment signals based on short interest.

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