We are downgrading Valspar Corporation (VAL) to Neutral from our previous Outperform recommendation. Valspar’s net income of 70 cents in the third quarter of fiscal 2010 missed the Zacks Consensus Estimate by a penny. Higher raw material costs and pricing pressures hurt profits in the Paint segment. The Coatings business has experienced some momentum recently with improving sales of Industrial and packaging products outside the US.
However, we believe that the company would post modest results in the upcoming quarter with subdued performance in the Paint segment and with the Coatings business growing moderately. Valspar’s solid results and robust margin gains in the past few quarters stem from dramatic cost reduction, increasing product prices and productivity gains. We are more optimistic and pin our hopes on Valspar’s long-term performance backed by volume increases in both the Paint and Coatings categories. Robust growth in China’s industrial and consumer activity is expected to fuel margin expansion for the Coatings business.
In the longer term, we believe Valspar should benefit from new business wins and increasing market share in the Coatings segment. Sales of Industrial and packaging products sales have been improving in foreign markets. We also expect robust growth in China’s industrial and consumer activity to fuel margin expansion for the Coatings category once demand reaches its peak.
Minneapolis based Valspar Corporation is the sixth largest paint and coatings manufacturer globally, with manufacturing operations all over the world including the U.S., Europe and Asia. It makes coatings for the global industrial, packaging and architectural markets.
Currently, the company’s shares are trading at 13.4x our 2010 EPS estimate of $2.25. The company’s current trailing 12-month earnings multiple is 13.7x, compared to the 17.0x average for the peer group and 18.4x for the S&P 500. Over the last five years, Valspar’s shares have traded in a range of 10.9X to 18.9X trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it would perform inline with the broader market. Our $32.00 target price based on 14.2x 2010 EPS reflects this view.
Valspar is a Short-term (1 to 3 months) Zacks #3 Rank (“Hold”).