We are downgrading our recommendation on
The Valspar Corporation
(
VAL
) to Neutral, considering raw material cost pressure and weakness
in its Paints division. The company had a mixed second-quarter
fiscal 2012 with earnings topping the Zacks Consensus Estimate
while sales missing the same.
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 is also expected to benefit from its
restructuring actions while maintaining its operational and pricing
discipline.
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, such as China.
However, we are 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
second quarter. The segment's growth has been impinged by inventory
reduction in the North American home improvement channel and the
soft Australian residential housing market.
Weakness across the home improvement channel in North America and
the residential housing market in Australia may continue to hurt
paint sales moving ahead. This promts us to tread with caution.
Valspar, which competes with
Sherwin Williams Company
(
SHW
) and
PPG Industries Inc.
(
PPG
), currently retains a short-term Zacks #2 Rank (Buy).
PPG INDS INC (PPG): Free Stock Analysis Report
SHERWIN WILLIAM (SHW): Free Stock Analysis
Report
VALSPAR CORP (VAL): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research