On Aug 25, we issued an updated research report on paints and coatings maker The Valspar Corporation (VAL). While the company should benefit from its investments in growth initiatives, new business wins and acquisitions, it remains exposed to an uncertain demand environment.
Both revenues and adjusted earnings for third-quarter fiscal 2014 (ended Jul 25, 2014), reported on Aug 12, beat Zacks Consensus Estimates. Revenues and profit rose on continued strength across the company’s paints and coatings businesses, backed by healthy gains in China. Valspar raised the bottom end of its earnings guidance for fiscal 2014.
Valspar, a Zacks Rank #3 (Hold) stock, has a strong pipeline of new products and significant opportunities for share gains in both its Paints and Coatings segments. Its Paints division is benefiting from continued rollout of Valspar branded products at Ace Hardware. Moreover, the newly launched Valspar Reserve interior and exterior paints are driving sales in the home improvement channel. Valspar is aggressively investing in advertising and marketing to support this new product.
Moreover, Valspar continues to see strength in its coatings business as evidenced by new business wins. The company is also managing its cost well and maintaining a cost structure that is appropriate for the current external environment.
Winning new businesses remain a company-wide focus that will position Valspar well for the future. The acquisition of paint manufacturing assets of Ace Hardware boosted its retail foothold in the U.S. The company is making a good progress with the integration of the acquired business. Moreover, Valspar has strengthened its position in the $6 billion European industrial coatings market with the takeover of Italy-based industrial coatings maker Inver Holding S.r.l.
However, the overall demand environment remains uneven. Coatings demand for general industrial products, mainly for off-road equipment, pipelines and shipping containers, remains somewhat weak.
We also account for volatility in raw material costs. Valspar has experienced disruptions in supplies of certain raw materials at various times, impacting its ability to manufacture products.
Moreover, high spending to support new retail programs and brand-building actions may affect margins in the company's paints business in the fourth quarter, as did in the third.
Other Stocks to Consider
Other companies in the specialty chemicals space with favorable Zacks Rank are International Flavors & Fragrances Inc. (IFF), BioAmber Inc. (BIOA) and Flexible Solutions International Inc. (FSI). While International Flavors & Fragrances holds a Zacks Rank #1 (Strong Buy), both BioAmber and Flexible Solutions retain a Zacks Rank #2 (Buy).