The picture is not too bright for paint makers currently. High input costs (read: titanium dioxide) have been giving paint companies a bad time, eating into their revenues.
Valspar's revenues have grown at a good compounded average rate of 21% in the last year. While new businesses added to the growth, a primary factor has been product prices.
Paint companies have been passing the buck to consumers each time their input prices are hiked. Valspar has also resorted to price hikes this year, which is reflected in the higher sales it achieved.
Sadly, top-line growth could not boost Valspar's bottom line, as input costs have gone up continuously. As a result, its net income growth has turned around from a compounded average of 3.7% over the last five years to a negative one-year rate of 5.5%.
Growth and stability
Valspar has been consistently adding to its business line through acquisitions and expansions. Last year, it acquired an Australian paint maker and added an India-based coatings company to its portfolio. Recently, Valspar acquired a Brazil-based coating company to gain a stronger foothold in Latin America. It has also opened 100 stores in China in the third quarter, and has even forayed into the big-shipping-container coating market, starting with a major China-based company.
These moves suggest Valspar's keen eye on emerging markets, and are benefiting the company with an almost 12% contribution to its third-quarter sales.
Valspar has also initiated some restructuring actions this year, such as shutting down a few facilities related to its wood coating product line, closing unprofitable stores and reducing costs in its paints segments.
Valspar's long-term debt has been reduced considerably to $688.2 million from $943.2 million last year. This has improved its total-debt-to-equity to 72.4%. This level is still pretty high, but most of it seems to be short-term debt. Interest coverage of 6.4 times provides comfort. Nevertheless, a dividend payout ratio of 32.2% appears a bit too high for the not-so-great cash balance of $152.5 million and high debt levels.
Let's take a look at how Valspar's valuation stacks up next to some of its peers:
Source: S&P Capital IQ.
Valspar looks fairly priced when compared to peers. A lower forward P/E further indicates how the company's earnings are expected to grow in the future, and the same has not really been factored into its share prices. This could mean good upside potential for the stock as the company delivers.
What I also like about Valspar is its impressive dividend payment history, with a nice current dividend yield of 2.3%.
The Foolish bottom line
Valspar's only major concern appears to be high input costs, which are affecting its bottom line. But the company is trying to offset these by hiking product prices.
Apart from this, the good revenue growth, great dividends, and solid expansionary moves make Valspar a good stock to pick.
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Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.