Paint maker Valspar’s
But Valspar might still be worth a watch. Want to know why? Read on...
Valspar’s revenue for the quarter surged 22.5% from the year-ago quarter to $1.07 billion, driven by higher product prices. Acquisitions also contributed almost 12% to top-line growth. Volumes in both the coatings and paint segment fell by around 1% in the quarter. Also, last year, the company lost its deal with Wal-Mart
In spite of a growing top line, Valspar’s gross margin fell from 34% to 30.3% year over year, as input costs shot through the roof. Net income, as a result, slipped 10% to $67.4 million. Paint companies have been buckling under the pressure of higher titanium dioxide (TiO2) prices. Peer Sherwin-Williams’
Valspar is increasing its presence in the emerging markets. It opened around 100 new warrant stores in China during the just-concluded quarter. Earlier in the year, Valspar acquired a Brazil-based coating company to strengthen its foothold in Latin America.
Valspar has also forayed into the big-shipping-container coating market, starting with a major China-based company.
The paint business also depends largely on factors like the housing market (especially sales of used homes). Seeing the prolonged housing downturn, Valspar lined up some restructuring activities, such as shutting down a few facilities dedicated to housing-related wood coating product line. Such restructuring moves, which cost Valspar $0.10 per share in Q3, will help it in cutting down costs. This looks like an intelligent move, especially at a time when higher costs have been hurting margins.
At the same time, to counter higher costs, paint companies have been hiking prices. Valspar last raised prices in July. Peer PPG Industries
The input game
I, however, am concerned how far price hikes can move margins for paint companies, as prices of TiO2 (a key input for paint companies) continue to soar. With major titanium dioxide players like DuPont
The Foolish bottom line
With Valspar’s management expecting another 20% jump in raw-material costs for the year, one may remain a little cautious now. Otherwise, the Minneapolis-based company seems to be doing well. It also pays dividends consistently (current dividend yield is 2.4%). To me, it looks like a stock worth keeping an eye on in the longer run.
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