On June 26, we issued an updated research report on paints and coatings maker Valspar VAL.
Valspar’s profit rose in second-quarter fiscal 2015 (ended May 1, 2015), reported on May 27, on its cost-containment and productivity actions. Adjusted earnings beat the Zacks Consensus Estimate. However, sales fell on a double-digit decline in the paint business, and missed expectations. The company backed its earnings guidance for fiscal 2015 while lowering its sales forecast.
Valspar, a Zacks Rank #3 (Hold) stock, has significant opportunities for share gains in both its Paints and Coatings segments. The company should benefit from new business wins, investments in growth initiatives and productivity actions.
Winning new businesses remain a company-wide focus that will position Valspar well for the future. The acquisition of paint manufacturing assets of Ace Hardware has reinforced Valspar retail foothold in the U.S. Moreover, Valspar has strengthened its position in the $6 billion European industrial coatings market with the takeover of Italy-based industrial coatings maker Inver Holding S.r.l. The recent purchase of Quest Specialty Chemicals’ performance coatings businesses also strengthens Valspar's foothold in the attractive automotive refinish market.
Valspar Paints division is also benefiting from continued rollout of Valspar branded products at Ace Hardware. The company has completed the launch of Valspar-branded paints in 350 retail locations in the U.K. and Ireland. Moreover, Valspar Reserve interior and exterior paints are also driving sales in the home improvement channel. Valspar is aggressively investing in advertising and marketing to support this new product.
The company is also managing its cost well and maintaining a cost structure that is appropriate for the current external environment. It also remains committed to boost shareholder return leveraging healthy cash flows.
However, Valspar faces currency headwinds, stemming from a stronger U.S. dollar. Unfavorable currency swings reduced its sales by roughly $55 million in the second quarter. The company now sees its revenues for fiscal 2015 to fall in the low single-digits (versus flat year over year expected earlier) factoring in the currency impact.
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. The overall demand environment also remains uneven.
Other Stocks to Consider
Other companies in the specialty chemicals space with favorable Zacks Rank include Ferro Corporation FOE, Flexible Solutions International Inc. FSI and KMG Chemicals Inc. KMG with all sporting a Zacks Rank #1 (Strong Buy).
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