Valspar Beats Estimate

The Valspar Corporation ( VAL - Analyst Report ) reported first-quarter 2012 earnings of 62 cents per share, surpassing the Zacks Consensus Estimate of 48 cents. Results also came in better than earnings of 39 cents in the year-ago quarter. Considering restructuring charges of 4 cents per share in the quarter and 5 cents per share related to acquisition in year ago quarter, earnings came in at 58 cents per share versus 34 cents in the year-ago quarter.

Revenues

Quarterly sales jumped 5.1% year over year to $885.6 million. Sales in Valspar’s Coatings segment increased 8.4% year over year to $494.6 million and sales in the Paints segment inched up 1.1% to $339.6 million.

Costs

Gross margin increased to 33.1% in the reported quarter versus 30.7% in the comparable year-ago quarter. Research and Development expenses decreased 3.3% to $26.9 million in the quarter while Selling, General and Administrative expenses increased 4.8% to $175.7 million in the reported quarter. Operating margin increased to 10.2% from 7.5% in the prior year. The company’s margins benefited from its carryover pricing actions, moderating raw material costs and improved productivity.

Financial Review

Cash and cash equivalents as of January 27, 2012 was $305.7 million .compared with $168.3 million as of January 28, 2011. Long-term debt came in at $1.1 billion as of January 27, 2012 versus $949.8 million as of January 28, 2011.

Outlook

For the rest of 2012, the company expects macro environment to remain challenging. It anticipates potential demand challenges across several of its businesses. Though the company remains optimistic about the U.S. and Latin market, it feels that European market will remain challenging.

Valspar expects 2012 to be challenging with rising raw material cost and expects raw materials inflation in mid-to-high single digits. Despite this, the company increased its full-year earnings guidance to $2.92-$3.12 as it expects to offset these challenges with new business, pricing, substantial productivity and effective cost management.

Our Take

Valspar’s solid results and robust margin gains in the past few quarters stem from its cost reduction efforts, increasing product prices along with productivity gains. We are more optimistic on Valspar’s long-term performance, which is likely to be driven by volume increases in both the Paint and Coatings categories.

The company retains a Zacks #2 Rank, which translates into a short-term (1 to 3 months) Buy rating and we have recommended the shares of the company as Outperform for the long-term (more than 6 months).

The company faces stiff competition from Sherwin Williams Company ( SHW - Analyst Report ) and PPG Industries Inc. ( PPG - Analyst Report ) ). Sherwin released its fourth quarter and full year 2011 results on January 26, 2012 and reported net earnings of 84 cents per share in the fourth quarter of 2011 excluding income tax expense of 70 cents per share compared with 67 cents per share in the year-ago quarter. PPG also declared its fourth quarter and full-year 2011 results on January 19, 2012 and posted net income of $216 million or $1.39 per share for the fourth quarter of 2011 compared with $205 million or $1.24 per share in the year-ago quarter.