We are downgrading our recommendation on The Valspar Corporation (VAL) to Neutral, considering raw material cost pressure and weakness in its Paints division. The company had a mixed second-quarter fiscal 2012 with earnings topping the Zacks Consensus Estimate while sales missing the same.
Valspar, the sixth largest paint and coatings manufacturer globally, has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments. The company is also expected to benefit from its restructuring actions while maintaining its operational and pricing discipline.
Valspar expects sales to benefit from the diverse mix of businesses and growth in the fast growing coatings markets in Asia and Latin America. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. It is also making good progress in restoring its operating margins through pricing and improved productivity.
Winning new businesses also remain a company-wide focus that will position Valspar well for the future and help offset lower demand in core markets. Its fastest growing markets are the emerging economies, such as China.
However, we are concerned about cost pressures associated with raw material inflation. Raw material costs have been volatile and Valspar has experienced disruptions in supplies of certain raw materials at various times, impacting its ability to manufacture products.
Moreover, Valspar’s paint segment recorded tepid growth in the second quarter. The segment’s growth has been impinged by inventory reduction in the North American home improvement channel and the soft Australian residential housing market.
Weakness across the home improvement channel in North America and the residential housing market in Australia may continue to hurt paint sales moving ahead. This promts us to tread with caution.
Valspar, which competes with Sherwin Williams Company (SHW) and PPG Industries Inc. (PPG), currently retains a short-term Zacks #2 Rank (Buy).
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