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
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
), 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
, titanium dioxide is a white pigment used in all sorts of
products, including paint. Dupont (
) 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.
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