Retaining Valspar at Neutral
We are maintaining our Neutral recommendation on The Valspar Corporation (VAL) following our assessment of its mixed fourth-quarter fiscal 2012 results. Adjusted earnings of 86 cents beat the Zacks Consensus Estimate by a penny. Sales edged down roughly 2% year over year to $1.02 billion and missed the Zacks Consensus Estimate of $1.08 billion.
Valspar, the sixth largest paint and coatings manufacturer globally, continues to see strength in its coatings business as evidenced by higher volumes, new business wins and market share gains. While the company expects the overall demand environment to be uneven moving ahead, it envisions a double-digit growth in earnings in fiscal 2013.
Valspar, which competes with Sherwin Williams Company (SHW) and PPG Industries Inc. (PPG), has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments. The company should also benefit from its restructuring actions in fiscal 2013.
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.
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.
However, Valspar’s Paint segment had a weak fourth quarter. The segment’s growth has been hurt by a weak residential housing market in Australia, which may continue to affect sales moving ahead.
We also remain 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.
Our recommendation on the stock is in agreement with a short-term Zacks #3 Rank (Hold).
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