On Dec 1, we issued an updated research report on paints and coatings maker Valspar VAL.
Valspar saw lower profits in fourth-quarter fiscal 2015 (ended Oct 30, 2015). But its adjusted earnings surpassed the Zacks Consensus Estimate. Sales fell year over year on lower volumes and unfavorable currency impact, and missed expectations. The company expects adjusted earnings per share for fiscal 2016 in the range of $4.80–$5.00, reflecting growth of 8%–13% in constant currency.
Valspar has a broad product portfolio and significant opportunities for share gains in both its Paints and Coatings segments. Moreover, new business wins, productivity actions, investments in growth initiatives and geographic expansion should benefit the company.
Winning new businesses remain a company-wide focus that will position Valspar well for the future. New business wins have contributed around 4% annually to its growth over the last several years and are expected to continue to be a major driver in 2016.
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 purchase of Quest Specialty Chemicals’ performance coatings businesses has also strengthens Valspar's foothold in the attractive automotive refinish market. The acquisition added 10% to Paints segment’s sales in the fourth quarter and is expected to add 3% to overall sales in fiscal 2016.
Valspar is also managing its cost well and maintaining a cost structure that is appropriate for the current external environment. Its company-wide restructuring and productivity programs (aimed at lowering costs and improve efficiency) should support margin improvement moving ahead. Valspar 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 6% in the fourth quarter. Currency headwind is expected to continue to weigh on its sales and earnings for fiscal 2016. The company sees currency to have an unfavorable impact of around 4%–5% on sales and 20 cents per share on adjusted earnings in fiscal 2016.
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.
Valspar currently has a Zacks Rank #3 (Hold).
Stocks to Consider
Other companies in the specialty chemicals space with a favorable Zacks Rank include American Vanguard Corp. AVD, Flexible Solutions International Inc. FSI and Chemtura Corporation CHMT, all carrying a Zacks Rank #2 (Buy).
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