We maintain our Neutral recommendation on The Valspar Corporation (VAL), the sixth largest paint and coatings manufacturer globally, having manufacturing operations throughout the world including the U.S., Europe and Asia.
Valspar Corporation’s net earnings moved to $0.84 per share in the fourth quarter of 2011 from last year’s $0.56, while sales jumped 19.4% to $1.05 billion. Both EPS and sales exceeded the Zacks Consensus Estimates. The company is making good progress in restoring its operating margins through pricing and improved productivity.
Over the past few quarters, Valspar has delivered solid earnings and robust margin gains. The improved results were attributable to dramatic raw material cost reduction along with increasing product prices, as well as aggressive cost reductions and productivity gains. Though raw material costs continued their upward trend during the quarter, the company expects double-digit earnings growth in fiscal year 2012. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment.
For 2012, the company continues to expect double-digit earnings growth in the range of $2.87 to $3.07 per share. Global economic conditions are presenting some challenges, but on a seasonally adjusted basis. Besides, Valspar does not expect its volumes to change materially from what the company experienced in the third quarter. The company will remain focused on the activities within its control, such as winning new businesses and managing cost structure.
Valspar continues to make progress by way of winning new businesses. In 2010, the company completed the acquisition of Wattyl Limited, an Australian paint manufacturer providing a strong brand portfolio in an excellent geography while diversifying the company’s overall sales mix. Additionally, the acquisition provides a supply chain to support its largest customer’s entry into the Australian market. Valspar’s fastest-growing markets are the emerging economies, such as China. The company witnessed strong growth in China including over 100 new warrant stores that opened during the third quarter. The company’s main focus is to win new businesses that will position Valspar well for the future while helping to offset lower demand in core markets.
However, Valspar faces tremendous pressure from the non availability of raw materials. During the past four to five years, raw material costs have been volatile, and Valspar has experienced disruptions in supplies of certain raw materials at various times. These disruptions could affect the company’s ability to manufacture products ordered by the customers. When raw material costs increase, the company’s profit margins are invariably reduced unless and until it is able to pass along the increases to the customers through higher prices.
Valspar competes with the likes of Sherwin Williams Company (SHW) and PPG Industries Inc. (PPG).
We maintain our Neutral recommendation on Valspar with a short-term Zacks #2 Rank (Buy) on the stock.
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