On Mar 4, we issued an updated research report on paints and coatings maker Valspar VAL. While the company should benefit from new business wins, investments in growth initiatives and productivity actions, it is exposed to currency headwind and volatility in raw material costs.
Valspar’s profit surged in first-quarter fiscal 2015 (ended Jan 30, 2015), reported on Feb 24, on continued strength in its coatings business and healthy performance in China. Both revenues and adjusted earnings for the quarter topped Zacks Consensus Estimates. 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. 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.
Valspar continues to see strength in its coatings business as evidenced by new business wins. Moreover, its Paints division is benefiting from continued rollout of Valspar branded products at Ace Hardware. The newly launched 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.
However, Valspar is exposed to currency headwind, stemming from a stronger U.S. dollar. Foreign exchange translation had a roughly 3% unfavorable impact on its sales in the first quarter. The company now sees its revenues for fiscal 2015 to be flat year over year (versus low single-digit growth expected earlier) factoring in the impact of a stronger dollar on its overseas sales.
The overall demand environment also remains uneven. Coatings demand for general industrial products, mainly for agricultural and mining equipment and containers, remains somewhat weak.
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 chemicals space with favorable Zacks Rank include Axalta Coating Systems Ltd. AXTA, Penford Corp. PENX and Daqo New Energy Corp. DQ. While Axalta and Penford sport a Zacks Rank #1 (Strong Buy), Daqo carries a Zacks Rank #2 (Buy).
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