On Aug 16, we reaffirmed our Neutral recommendation on paints and coatings maker Valspar Corporation (VAL). While Valspar should benefit from acquisitions, effective cost management and strength in the U.S., we maintain our cautious stance given the uncertain demand environment.
Why Retained?
Both revenues and earnings for third-quarter fiscal 2013 (ended Jul 26, 2013), reported on Aug 13, missed Zacks Consensus Estimates. Valspar recorded higher sales in its paint business in the quarter, driven by volume gains in the U.S and strength in China. Volumes increased by double digits in the U.S., driven by growth in consumer paints, packaging, coil and wood product lines. Valspar, however, narrowed its earnings forecast for fiscal 2013 citing macroeconomic headwinds.
Valspar, a Zacks Rank #3 (Hold) stock, has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments. It continues to see strength in its coatings business as evidenced by new business wins. Valspar’s fastest growing markets are the emerging economies.
Valspar should also benefit from its restructuring actions in fiscal 2013. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. Valspar also remains committed to boost shareholder return leveraging healthy cash flows.
Winning new businesses also remain a company-wide focus that will position Valspar well for the future and help offset lower demand in some of its core markets. In this context, the recent acquisition of Italy-based industrial coatings maker Inver Holding S.r.l. represents a significant move. The buyout reinforces Valspar’s position in the $6 billion European industrial coatings market and offers operational synergies.
However, we remain concerned about weakness in general industrial markets. Valspar continues to see weak coatings demand for general industrial products, mainly for off-road equipment. Moreover, its paint business in Australia continues to be impacted by a weak non-residential construction market. The overall demand environment is expected to be uneven in fiscal 2013.
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.
Other Stocks to Consider
Other companies in the specialty chemical space with favorabe Zacks Rank are Ferro Corp. (FOE), KMG Chemicals Inc. (KMG) and Sensient Technologies Corporation (SXT). While Ferro retains a Zacks Rank #1 (Strong Buy), KMG Chemicals and Sensient Technologies retain a Zacks Rank #2 (Buy).
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