Valspar Barely Misses - Analyst Blog

Paints and coatings maker Valspar Corp. (VAL) recorded net income of $75.1 million or 74 cents per share in the third quarter of fiscal 2010, up 15.5% from last year’s $65 million or 61 cents per share. Earnings were helped by a stronger catings business that negated subdued performance in the paints business. However, adjusting for restructuring charges and gain from sale of assets, earnings of 70 cents narrowly missed the Zacks Consensus Estimate of 71 cents.

Revenues

Quarterly revenues climbed 10% to $873.9 million helped by new business efforts, offsetting higher raw material costs, yet it missed the Zacks Consensus Estimate of $878 million. Cost control efforts reduced operating expenses, which as a percent of sales were 20.9% versus last year’s 22.6%. However, cost of sales jumped 16% to $583 million from $504 million. Gross margins came in at 34% down from 37.1% in the year-ago quarter.

Segment Review

Sales in the Coatings segment grew 17% to $484 million, primarily driven by higher volumes, while operating profits shot up 31% to $80.5 million. Valspar’s paints business suffered from lower volumes, especially in the architectural paints business, leading to a modest rise in revenues to $323 million in the segment. Weak revenues and higher raw material costs affected profits in the segment. Operating profits of $38.6 million reflected a 21% decline year over year.

Financial Review

Cash and cash equivalents of $232 million as of Jul 30, 2010 advanced 24% from $188 million as of Oct 30, 2009. Long-term debt of $4.5 million declined 16% from $5.4 million as of Oct 30, 2009. Valspar’s debt-to-capital has remained on the lower side (35%-36%) in the last couple of quarters.

Outlook

Valspar expects to earn $2.15 to $2.25 per share in fiscal 2010. The company expects to continue to benefit from new business and costs control efforts.

Zacks Recommendation

Over the past few quarters, Valspar has delivered solid earnings and robust margin gains. We attribute this to dramatic raw material cost reduction along with increasing product prices, as well as aggressive cost reductions and productivity gains.

Valspar initiated measures to lower its cost structure and increase the efficiency of its operations in July 2008. As part of that effort, it closed four manufacturing plants in North America followed by the closure of two additional plants in fiscal 2009. The company managed total cost savings of about $20 million or about 13 cents per share in 2009. In addition, Valspar is moving aggressively to increase prices in all its business segments, moving up at an annual rate of 3% to 4%.

Last month, Valspar’s peer Sherwin Williams (SHW) reported adjusted net income of $1.72 per share, beating the Zacks Consensus Estimate of $1.64 in the second quarter of 2010. However, the company’s paint business results were affected by higher raw costs that restrained profits. Another peer, PPG Industries (PPG) earned $1.64 per share, outshining the Zacks Consensus Estimate of $1.43 per share. The company witnessed lower volumes and higher raw material costs in the second quarter of 2010.

The Zacks Consensus Estimate on Valspar’s earnings is pegged at 57 cents and $2.23 per share for the next quarter and fiscal 2010, respectively, with a downside potential of 1.75% and 3.14%. Currently, Valspar has a short-term Zacks #3 Rank ('Hold') rating.
 
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