Valspar (VAL, Financial) operates in two segments -- Coatings and Paints – and develops, manufactures, and distributes a range of coatings, paints, and related products worldwide, while competing with the likes of Akzo Nobel (AKZOY, Financial), PPG Industries (PPG, Financial) and Sherwin-Williams (SHW, Financial).
The coatings company posted mixed second-quarter fiscal 2015 results, as it won on earnings but failed to meet expectations on revenue. The stock has lost around 4% year-to-date, so does it present a buying opportunity for investors? Let’s take a peek at the quarter and prospects ahead.
Second-quarter numbers
Currency headwinds impacted sales by around $55 million. In addition, the demand for paint products in the North American market was muted. As a result, during the second-quarter, sales declined 11% year-over-year to $1,079.3 million, whereas analysts were expecting $ 30 million more.
The Coatings division registered 1% year-over-year decline in sales to $615 million, despite volume gains of 3%. However, in currency neutral terms, sales increased 5% year over year. This was seventh consecutive quarter of growth in the Coatings division, on currency neutral terms.
On the other hand, the Paints segment witnessed 15% year-over-year decline in sales to $403 million as a result of 12% decline in volumes, currency translation headwinds and product line adjustment at product line adjustment at Lowe's (LOW). In addition, the company was up against stellar quarter in the prior year due to new product launches at both Lowe's and Ace.
The company posted profit of $90.3 million or $1.09 per share, representing 5% year-over-year increase and beating analysts’ expectations by $0.01 per share.
Valspar exited the second-quarter with cash and cash equivalents of $146.3 million and long-term debt of $1,350 million. The company bought back 1.1 million shares worth $92.5 million during the reported quarter.
Currency headwind
Currency translation headwind will impact the results of the company going forward. Valspar has revised downwards its projected sales numbers, and now expects sales to fall in the low single-digits year-over-year compared to prior forecast of roughly flat sales. However, on currency neutral basis, it expects sales to rise by low single-digits during fiscal 2015.
However, the company reaffirmed its adjust earnings per share to be in the range $4.45 to $4.65 for fiscal 2015.
Shopping for growth
Acquisition has been in Valspar’s DNA as a means of driving growth. The company has done meaningful acquisitions in the past. Continuing on this trend, the company announced that it has reached an agreement to acquire the performance coatings businesses of Quest Specialty Chemicals, Inc., which include automotive refinish and industrial coatings. Gary Hendrickson, Chairman and CEO of Valspar, said:
"Our customers will benefit from expanded distribution of a portfolio of preferred brands they know and trust, a broader range of high-performance products and a stronger service network. We are pleased to welcome the Quest team to the Valspar family to help deliver these benefits to our customers."
New products and partners to drive growth
Valspar recently launched a new lineup of Pro paint, including lines that are now zero VOC. Valspar Reserve was rated the number one zero VOC paint in the U.S. by a leading consumer publication.
In New Zealand, Mitre 10 selected Valspar as its new strategic paint partner. Valspar Paint will be available in all 81 million Mitre 10 stores this fall. In the independent channel in U.S. alone, Valspar is sold in over 8000 stores.
Wrapping up
Valspar has done reasonably well. The growth of partner network across the globe and innovative products will drive growth in the long run. The company has a good history of posting positive earnings surprises. For the next five years, analysts expect compound annual growth rate of 11.80%. So, I see this as a good stock to own for the long run.
