Valspar: Risk-Reward Even

On May 21, we issued an updated research report on The Valspar Corporation (VAL). While the paints and coatings maker should gain from new business wins, acquisitions and effective cost management, it remains exposed to weakness in general industrial markets and an uncertain demand environment.

Both revenues and adjusted earnings for the second quarter of fiscal 2014 (ended Apr 25, 2014), reported on May 19, beat Zacks Consensus Estimates. Revenues and profit rose on strength across the company’s paints and coatings businesses and contributions from acquisitions. Valspar backed its earnings guidance for 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 Paints and Coatings segments. It continues to see strength in its coatings business as evidenced by new business wins. Valspar is also managing its cost well and maintaining a cost structure that is appropriate for the current external environment.

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 boosted its retail foothold in the U.S. The company is making a good progress with the integration of the acquired business and now has over 3,000 Ace stores with Valspar products. Moreover, the company 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.

Valspar’s Paints division is benefiting from continued rollout of Valspar branded products at Ace Hardware. Moreover, the recently launched Valspar Reserve interior and exterior paints are driving sales in the home improvement channel. Valspar is aggressively investing to promote this new product.

However, Valspar is still seeing weakness in general industrial markets. It continues to witness weak coatings demand for general industrial products, mainly for off-road equipment, pipelines and shipping containers. The overall demand environment remains uneven.

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.

Moreover, higher investments associated with the launch of Valspar Reserve and other initiatives coupled with elevated incentive compensation expenses may affect earnings in the company's paints business in the third quarter.

Other Stocks to Consider

Other companies in the specialty chemicals space with favorable Zacks Rank are International Flavors & Fragrances Inc. (IFF), Sensient Technologies Corporation (SXT) and Zep, Inc. (ZEP) with all holding a Zacks Rank #2 (Buy).