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Analyst Blog

Shares of Valspar touched a new 52-week high yesterday following the release of its first-quarter fiscal 2014 (ended Jan 24, 2014) results that showed strength across its paints and coatings businesses, aided by an improving U.S. housing market.

The Minneapolis-based company raked in earnings, barring restructuring charges, of 70 cents per share for the quarter that topped the Zacks Consensus Estimate by 3 cents and exceeded the year-ago quarter earnings of 60 cents.

Profit, as reported, slipped 2.7% year over year to $53.6 million or 61 cents a share, impacted by restructuring charges.

Shares of the 200-plus years old paints and coatings maker shot up roughly 8% to a 52-week high of $76.18 yesterday on the earnings beat. The stock pulled back to close the day at $75.03, gaining roughly 6%. Valspar shares are up around 21% in the last 12 months.

Revenues Rise as Paints, Coatings Shine

Revenues rose 9% year over year to $956.1 million in the reported quarter with double-digit gains witnessed across Paints and Coatings divisions. It beat the Zacks Consensus Estimate of $950 million. Sales were driven by healthy gains in the U.S., new business wins and acquisitions.

Revenues from Valspar’s larger Coatings division rose 10% year over year to $549 million in the quarter on continued gains in packaging product and wood product lines and contributions of Inver acquisition, offsetting sustained weakness in general industrial markets.

Sales from the Paints segment went up 10% to $361 million on strong volume gains across the U.S. and China, improved volumes in Australia and new business wins. Sales rose by double-digits in Valspar’s U.S. consumer paint business. The division also benefited from a recovering U.S. housing market and rollout of Valspar branded products at Ace Hardware.

Margins and Expenses

Gross margin (as reported) clipped to 33.4% in the reported quarter from 33.6% a year ago. Adjusted gross margin rose to 34% from 33.6% in the prior-year quarter, supported by better sales mix and higher sales volume. Operating expenses rose 11% year over year to $223.5 million due to higher selling, general and administrative costs and restructuring charges. Operating expenses (as a percentage of sales) were 23.4%, up from 22.9% a year ago.

Financials

Valspar ended the quarter with cash and cash equivalents of $192.6 million, down around 23% year over year. Total long-term debt was essentially flat year over year at $1,012.4 million.

Valspar repurchased around 975,000 shares during the reported quarter for roughly $69 million.

Guidance Backed

Valspar, which is one the prominent paints makers along with Akzo Nobel , PPG Industries and Sherwin-Williams , reaffirmed its adjusted earnings forecast of $3.95 to $4.15 per share for fiscal 2014. The company said that it will continue to focus on driving growth in fiscal 2014 through new business wins, gains from acquisitions and efforts to improve productivity.  

Our View

Valspar, a Zacks Rank #2 (Buy) stock, 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.

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