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Leading paint and coatings maker The Valspar Corporation’s (VAL - Analyst Report) third-quarter fiscal 2013 (ended Jul 26, 2013) adjusted earnings (barring nonrecurring  items) of $1.07  per share missed the Zacks Consensus Estimate of $1.11 per share, but improved from the year-ago quarter earnings of 97 cents per share. Profit, as reported, rose 8.6% year over year to $93.8 million or $1.04 a share.

Revenues

Net sales edged up 1% year over year to $1,089 million in the reported quarter, missing the Zacks Consensus Estimate of $1,136 million. The results lagged expectations due to continued macro-economic headwinds in key general industrial market segments and certain international regions.

However, Valspar continued its strong performance in the U.S. where volumes increased in double digits, driven by growth in consumer paints, packaging, coil and wood product lines. Valspar logged a 7% gain in overall volumes in the quarter.

Revenues from Valspar’s Coatings unit edged up 1% year over year to $573 million as increases across packaging, wood product lines were masked by lower demand for general industrial products, mainly in the coatings for off-road equipment and shipping containers.

However, sales from the Paints segment rose 3% to $455 million in the quarter on strength in China and double-digit volume gain in the U.S.

Margins and Expenses

Gross margin (as reported) rose slightly to 33.9% in the reported quarter from 33.8% a year ago. Adjusted gross margin slipped to 34.1% from 34.2% in the prior-year quarter. Operating expenses fell 3.5% year over year to $213.8 million, helped by lower selling, general and administrative costs and restructuring charges. Operating expenses (as a percentage of sales) were 19.6%, down from 20.5% a year ago.

Sound Balance Sheet

Valspar maintained a healthy balance sheet with cash and cash equivalents rising 92.4% year over year to $349.2 million at the end the quarter. Total long-term debt declined 3.8% year over year to roughly $1,016.2 million.

Outlook

Valspar narrowed its adjusted earnings forecast for fiscal 2013 and now expects it to be in the range of $3.45 to $3.55 per share, down from the earlier forecast of $3.60 to $3.80 per share. The lower adjusted earnings forecast was based on the third quarter results and the anticipated impact of continued macro-economic headwinds.

Our Take

Valspar has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments globally. The company should also benefit from its restructuring actions while maintaining its operational and pricing discipline. We are optimistic about Valspar’s long-term performance, which is likely to be driven by volume increases in both the paint and coatings categories .However, we are concerned about the irregular demand trends across its end markets and weakness for some of its products in overseas markets.

Valspar currently retains a Zacks Rank #3 (Hold).

Other companies in the specialty chemical space with favorabe Zacks Rank are Ferro Corp. (FOE - Snapshot Report), Sensient Technologies Corporation (SXT - Snapshot Report) and KMG Chemicals Inc. (KMG - Snapshot Report). While Ferro holds a Zacks Rank #1 (Strong Buy), both Sensient Technologies and KMG retain a Zacks Rank #2 (Buy).
 

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