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Valspar Retained at Outperform

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We reiterate our Outperform recommendation on The Valspar Corporation , the sixth largest paint and coatings manufacturer globally. Its earnings of 62 cents a share for first-quarter 2012 topped the Zacks Consensus Estimate of 48 cents.

Revenues rose 5% year over year to $885.6 million led by higher sales from the Minnesota-based company’s Coating segment. Valspar witnessed improved margins in the quarter, supported by lower raw material cost, pricing and better productivity.

Moving ahead, the company continues to expect double-digit earnings growth in 2012 despite raw materials inflation. 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, however, expects the macro environment to remain challenging for the remainder of 2012 and foresees fluctuating demand across several of its businesses. While Valspar remains optimistic about the U.S. and Latin American markets, it feels that the European market will remain challenging in 2012.

Valspar has delivered solid earnings gains over the last few quarters, backed by increasing product prices, aggressive cost reductions and productivity gains. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. Valspar is making good progress in restoring its operating margins through pricing and improved productivity.

Valspar continues to make progress by way of winning new businesses. The acquisition of Australian paint maker Wattyl Limited, in 2010, offered  a strong brand portfolio in an excellent geography while diversifying its overall sales mix. Valspar’s fastest-growing markets are the emerging economies, such as China. Winning new businesses is a company-wide focus that will position it well for the future and help offset lower demand in core markets.

We believe Valspar has a strong pipeline of new products and significant opportunities for share gains across its Paint and Coatings segments globally. The company is expected to benefit from its restructuring actions while maintaining its operational and pricing discipline. 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.

Valspar competes with the likes of Sherwin Williams Company (SHW - Free Report) and PPG Industries Inc. (PPG - Free Report) . Our recommendation on the stock is supported by a short-term Zacks #1 Rank (Strong Buy).

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