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Valspar's Earnings Tops, Hits New 52-week High

Zacks Equity Research

Shares of leading paints and coatings maker Valspar Corp. (VAL) clocked a new 52-week high yesterday following the release of its second-quarter fiscal 2013 (ended Apr 26, 2013) results that showed a rebound in its paint business.

The Minneapolis-based company reported earnings, barring restructuring charges, of 91 cents per share for the quarter that beat the Zacks Consensus Estimate by a couple of cents and exceeded the year-ago quarter's earnings of 84 cents per share.

Profit, as reported, rose modestly year over year to $76.9 million or 84 cents a share as gains in Valspar’s Paints segment was neutralized by a decline in the larger Coatings division.  

Valspar’s shares rose roughly 5.5% to a new 52-week high of $71.57 on the earnings beat and encouraging results in the paint business. The stock closed at $71.46 at the end of the trading session yesterday. Valspar’s shares are up roughly 15% so far this year.

Sales Miss, but Paint Shines

Sales were essentially flat year over year at $1,031.2 million in the reported quarter, missing the Zacks Consensus Estimate of $1,064 million. Despite irregular demand trends across a number of end-markets, Valspar logged a 7% gain in overall volumes in the quarter.   

Revenues from Valspar’s Coatings unit edged down 1% year over year to $537 million as rise across packaging, wood and coil coatings was masked by lower demand for general industrial products.

Sales from the Paints segment, however, rose 3% to $438 million in the quarter on higher volume and a double-digit sales gain in North America. A recovery in the housing market aided the segment’s performance. This represents an encouraging sign as the division struggled with lower sales in the last couple of quarters, partly due to depressed demand in overseas markets.

Margins and Expenses

Gross margin (as reported) fell to 32.8% in the reported quarter from 34.4% a year ago. Adjusted gross margin declined to 33.5% from 34.6% in the prior-year quarter. Operating expenses fell roughly 7% year over year to $208 million, helped by lower selling, general and administrative costs. Operating expenses (as a percentage of sales) were 20.2%, down from 21.8% a year ago.

Sound Balance Sheet

Valspar maintained a healthy balance sheet with cash and cash equivalents rising 9.5% year over year to $228.3 million at the end the quarter. Total long-term debt declined 17% year over year to roughly $1,044.2 million.
Guidance Backed

Valspar, which is among the leading paints companies along with PPG Industries (PPG) and The Sherwin-Williams Company (SHW), reaffirmed its earnings forecast of $3.60 to $3.80 per share for fiscal 2013. The company sees improved results in the second half based on the domestic housing rebound and new business initiatives.
Valspar also noted that its restructuring measures are expected to result in one-time, after-tax charges of $18 to $23 million in fiscal 2013 and 2014. Its restructuring actions are primarily aimed at improving manufacturing capabilities in North America following the buyout of the paint manufacturing assets from Ace Hardware Corporation in earlier this year. The acquisition is expected to boost Valspar’s retail foothold in the U.S. and offer incremental revenues from the sale of Ace-branded paints.

Last month, Valspar extended its retail paint program with Lowe’s (LOW) to meet the needs of the professional painters. The program includes Valspar-branded professional grade products in multiple formulations and finishes that simplify paint selection and deliver durable performance as per the needs of professional painters. Valspar, through this new retail paint program, expects to reach more than 1,700 Lowe’s retail locations.

Our View

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 globally. The company should also benefit from new business wins and restructuring actions. However, we are cautious about cost pressures associated with raw material inflation.

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