On Nov 21, we retained our Neutral recommendation on The Valspar Corporation (VAL). While the paints and coatings maker should benefit from new business wins, acquisitions and effective cost management, we remain on the sidelines given weakness in general industrial markets and uncertain demand environment.
Why Retained?
Both revenues and adjusted earnings for fourth-quarter fiscal 2013 (ended Oct 25, 2013), reported on Nov 19, beat Zacks Consensus Estimates. However, profit slipped year over year on hefty restructuring charges. Valspar saw higher sales across its paints and coatings businesses in the quarter. The company expects accelerated revenues and earnings gains in 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 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.
Winning new businesses remain a company-wide focus that will position Valspar well for the future and help offset lower demand in some of its core markets. The acquisition of Italy-based industrial coatings maker Inver Holding S.r.l. represents a significant move and reinforces Valspar’s position in the $6 billion European industrial coatings market.
Valspar should also benefit from its restructuring actions in fiscal 2014. 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.
However, we are wary about weakness in general industrial markets. Valspar continues to see weak coatings demand for general industrial products, mainly for off-road equipment, pipelines and shipping containers. Moreover, its paint business in Australia continues to be impacted by a weak non-residential construction market. Weakness across these markets may sustain into fiscal 2014.
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), RPM International Inc. (RPM) and Minerals Technologies Inc. (MTX). All of them hold a Zacks Rank #2 (Buy).
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