We have retained our Neutral recommendation on paint and coatings maker Valspar Corporation (VAL - Analyst Report) following our assessment of its first-quarter fiscal 2013 results. We remain cautious given the uncertain demand environment.
Both revenues and earnings for the first quarter missed the Zacks Consensus Estimates, hurt by weak market conditions. The company cut its earnings forecast for fiscal 2013 citing a soft demand environment across some overseas markets.
Valspar continues to see strength in its coatings business as evidenced by new business wins. It 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 in fiscal 2013.
Valspar is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. 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. Valspar also remains committed to boost shareholder return leveraging healthy cash flows.
However, Valspar’s paint segment had a weak first quarter, partly due to depressed demand in overseas markets. The segment’s growth has been hurt by a weak residential housing market in Australia, which may continue to affect sales moving ahead. The overall demand environment is expected to be uneven in fiscal 2013.
We also 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.
Valspar currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).
Other Stocks to Consider
Other companies in the specialty chemicals industry with favorable Zacks Rank are Novozymes A/S (NVZMY - Snapshot Report), Penford Corporation and Chemtura Corporation (CHMT - Snapshot Report). While both Novozymes and Penford hold a Zacks Rank #1 (Strong Buy), Chemtura carries a Zacks Rank #2 (Buy).