It's never fun to be between the hammer and the anvil, but that's exactly where some specialty chemicals companies like Valspar (NYSE: VAL ) have found themselves. They face high raw material prices on one side and pricing constraints on the other. Nothing lasts forever, though, and Valspar might be worth a look if raw material costs begin to abate.
Valspar makes paints and coatings, competing with the likes of PPG (NYSE: PPG ) , Sherwin Williams (NYSE: SHW ) , and Imperial Chemical (NYSE: ICI ) . On the plus side, the company is selling more product through Lowe's (NYSE: LOW ) ; however, its profits have been hurt by higher recent prices of inputs like acrylics, solvents, and titanium dioxide.
Even so, those higher costs didn't exactly cripple Valspar this quarter. Sales were up a bit less than 9%, as volume rose 1.5% and pricing climbed more than 5%. Gross margins improved a bit, and operating income was up a nice 24% on an as-reported basis. Moreover, the company continues to generate cash flow.
It's always a good idea to keep expectations modest, but at least a couple of things could favor Valspar in the relatively near term. The company's Cabot brand of stains is getting placed into Lowe's, which should benefit sales considerably. Additionally, new capacity will be coming onstream in the commodity chemicals world. Coupled with lower natural gas prices, that gives some reason for hope on the raw materials side.
Of course, there are always risks to keep in mind. Dealing with a company like Lowe's is a mixed blessing -- it exposes your product to a large volume of potential customers, but it can squeeze you on pricing. Let's also not forget the housing-market boogeyman, which periodically crops up and scares investors away from any companies that get some business from that market.
Though I like the company and its prospects, I don't see a huge amount of untapped potential in the stock, and I usually like to go in with a healthy double-digit discount in my pocket. I might be a little more conservative on growth or discount rates relative to the average Fool, though. As always, I encourage you to check this one out for yourself.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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