Valspar has you covered


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Valspar has you covered

Bobby Raines 11/18/2013

The economy is continuing to improve, albeit slowly, and with a number of people becoming increasingly concerned about bubbles in the stock market and other assets, it seems like the Federal Reserve will announce the beginning of the end of its current quantitative easing program sometime relatively soon.

While some Fed watchers say the taper could start as soon as the central bank's December meeting, almost everyone expects to see at least some reduction in asset purchases by the end of the second quarter next year.

The last time current Fed Chairman Ben Bernanke talked seriously about such a move, interest rates jumped. They've drifted back down since then as the taper has failed to materialize, but they will go up again.

Now, to be fair, interest rates have a LONG way to rise before they can reasonable be considered high by historical standards. That doesn't mean that people who've grown accustomed to the ludicrously low rates of the last several years won't experience some degree of rate shock when they see 10-year Treasury bonds trading at rates above 3%. Or 30-year mortgage rates in the neighborhood of 5% or more. 

That rate shock is likely to slow the increase we've seen in home sales lately, and will probably have a slightly larger impact on prices. It turns out that most people by a home based not on the actual sale price, but based instead on the monthly payment. Higher interest rates means a larger percentage of the monthly payment goes to interest, leaving less to go towards the cost of the house.

That's not the worst thing in the world though, prices are unlikely to go up at their current rate forever, and some moderation in the rise could help deflate the new bubble that some people recently claim to have spotted in real estate prices.

 Some people believe that slower home sales can be good for home-improvement related stocks on the idea that people who stay in their homes longer spend more on maintenance. I don't actually believe that. People getting their homes ready to sell tend to replace carpets and paint the walls to get them looking as nice as possible.  Meanwhile, a lot of homebuyers see their new digs for their potential and spend money on new blinds, light fixtures or paint to bring what they bought in line with their vision for the place.

Higher rates COULD lead some people to stay in their homes longer, but I'm not convinced that a 100 basis point increase in interest rates is going to convince anyone that they actually wanted a new coat of paint and not a new house.

All of that is a long way pointing you in the direction of Valspar ( VAL ), which reports earnings this week. Analysts expect the paint and coatings maker to earn 92 cents per share on $1.09 billion in revenue. That compares to 85 cents per share on $1.02 billion in sales reported in the year-ago quarter.

The company actually missed on the top and bottom lines in July when it reported the results of its third fiscal quarter. Valspar also lowered its expectations for the full year to $3.45 to $3.55 per share, down from a prior estimate for $3.80 per share. Given that the company only missed estimates by about two cents in the third quarter, I think a modified version of " beat and lower " may be going on with that new estimate.

I have a feeling the company should do better this quarter. As I mentioned last week , titanium dioxide is a white pigment used in all sorts of products, including paint. Dupont ( DD ) is, for now, the world's largest producer of that pigment. When Dupont reported its third quarter earnings on Oct. 22, the company said its performance chemicals unit, which produces titanium dioxide and a some other things saw higher sales volumes, but received lower prices than in previous periods.

It's impossible to tie that directly to Valspar, but it seems likely that the company at least got lower prices for some raw materials during the quarter and may well have seen an increase in sales as well.

Chart courtesy of

Traders who think the company may have knocked its guidance a little lower than necessary to help it meet or exceed expectations this time around, or think you can learn anything about Valspar from Dupont's results, may want to consider a January 60/65 bull-put credit spread.  This position yields a 55-cent credit on day one, which is a 12.36% return, or 73.95% on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock is above 65 at January expiration, giving it about 8% downside protection.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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