Valspar Reports In Line - Analyst Blog

Valspar Corporation's (VAL) fourth quarter 2010 net earnings moved up 2 cents to 51 cents from last year's 49 cents. Adjusted net earnings of 56 cents were up 3 cents year over year in the fourth quarter of 2010 and matched the Zacks Consensus Estimate. For the full year 2010, adjusted earnings per share increased 26% to $2.23 in 2010 from $1.77 in 2009. Full year earnings exceeded the Zacks Consensus Estimate by a penny.

Revenues

Quarterly sales jumped about 13% year over year to $876.8 million driven by stronger volumes on the back of new business efforts, offsetting higher raw material costs, and surpassing the Zacks Consensus Estimate of $830 million. Operating expenses went up 18% year over year and formed more than 66% of sales compared with last year's 64%. Rising raw material costs negatively affected the fourth quarter gross margins that came in at 33.3%, down from 36.4% in 2009.

Segment Review

Valspar's packaging as well as industrial product lines in the Coatings segment continued to perform well. Coatings segment sales increased 14% year over year to $497 million on higher volumes. However, operating profits were almost flat at $73 million.

In the Paint segment, Valspar continues to invest in new brands such as the recently launched brand Signature paint with Hi-DEF Advanced Color System technology driving revenues. Paints segment revenues shot up 9% year over year to $316 million reflecting higher volumes in the global consumer and automotive refinish product lines that were partially offset by the loss of the Wal-Mart (WMT) business in the US. New business in the resin product line also drove revenues. Revenues were particularly high in China. However, operating income declined 5% on higher costs.

Financial Review

Fourth quarter 2010 operating cash flows declined more than 50% to $88 million from $182 million in the year-ago quarter. The company attributed the decline to higher credit sales during the quarter. For the full year 2010, Valspar generated $135 million in free cash flow. Comparatively, net debt increased 20% to $771 million from the previous quarter. The increase was primarily attributable to the Wattyl acquisition in the Paint segment. Valspar's debt-to-capital ratio was 32.1%.

Valspar repurchased approximately 1 million shares for $31 million during the fourth quarter of 2010. The company bought back 4 million shares under its October 2009 authorization. In October 2010, the company's board issued a new authorization for the repurchase of an additional 15 million shares.

Outlook

Valspar expects to continue to benefit from new businesses. Valspar expects adjusted net income per share to be in the range of $2.45 to $2.65 per share in fiscal 2010. However, the company expects raw material costs to increase during the first half of fiscal 2011. Valspar expects free cash flow of about $150 million in fiscal 2011.

Zacks Consensus Estimate

Valspar outperformed the Zacks Consensus Estimate in the first two quarters of fiscal 2010 while it fell short of the estimate in the third quarter and matched the Consensus Estimate in the reported quarter. This is reflected in the positive average surprise of 24.59%. For the upcoming quarter and full year 2010, the Zacks Consensus Estimate is pegged at 39 cents and $2.51 per share, with an upside potential of 2.56% and 1.59%, respectively. Estimates have remained unchanged over the last few months.

Valspar's peer Sherwin Williams Company (SHW) earned $1.60 per share in the third quarter of 2010, missing the Zacks Consensus Estimate of $1.68 per share by 8 cents.

Currently Valspar is a short-term (1 to 3 months) Zacks #3 Rank and a long-term (6+ months) Neutral recommendation.

 
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