Valspar Reaffirmed at Neutral

We are retaining our Neutral recommendation on The Valspar Corporation (VAL - Analyst Report) following its mixed third-quarter fiscal 2012 results. Adjusted earnings of 97 cents a share edged past the Zacks Consensus Estimate of 96 cents. Sales inched up 0.7% year over year to $1,078.3 million, falling behind the Zacks Consensus Estimate of $1,135 million.

Valspar, the sixth largest paint and coatings manufacturer globally, has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments. The company should also benefit from its restructuring actions.

Valspar expects sales to benefit from the diverse mix of businesses and growth in the fast growing coatings markets in Asia and Latin America. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. It is also making good progress in restoring its operating margins through pricing and improved productivity.

Winning new businesses also remain a company-wide focus that will position Valspar well for the future and help offset lower demand in core markets. Its fastest growing markets are the emerging economies.

However, Valspar sees a challenging fourth quarter as it expects sluggish growth in North America and sustained weakness in some overseas markets, especially China.

We remain concerned about cost pressures associated with raw material inflation. Raw material costs have been volatile and Valspar has experienced disruptions in supplies of certain raw materials at various times, impacting its ability to manufacture products.

Moreover, Valspar’s paint segment recorded tepid growth in the third quarter. The segment’s growth has been stymied by weakness in the residential housing market in Australia. We feel that a soft Australian residential housing market may continue to hurt paint sales moving ahead.

Valspar, which competes with Sherwin Williams Company (SHW - Analyst Report) and PPG Industries Inc. (PPG - Analyst Report), currently retains a short-term Zacks #3 Rank (Hold).