March 04, 2015 The Valspar Corporation Current Recommendation Prior Recommendation Outperform Date of Last Change 07/05/2012 Current Price (03/03/15) $87.26 Target Price $92.00 NEUTRAL (VAL-NYSE) SUMMARY We are retaining our Neutral recommendation on Valspar. The company s profit surged in first-quarter fiscal 2015 on continued strength in its coatings business and healthy performance in China. Both revenues and adjusted earnings for the quarter topped Zacks Consensus Estimates. The company backed its earnings guidance for fiscal 2015 while lowering its sales forecast. Valspar has a strong pipeline of new products and significant opportunities for share gains in both its Paint and Coatings segments globally. The company should also benefit from new business wins and productivity actions. However, Valspar is exposed to currency headwind and volatility in raw material costs. Moreover, the overall demand environment remains uneven. SUMMARY DATA 52-Week High $88.16 52-Week Low $70.04 One-Year Return (%) 18.90 Beta 0.92 Average Daily Volume (sh) 490,442 Shares Outstanding (mil) 84 Market Capitalization ($mil) $7,330 Short Interest Ratio (days) 4.58 Institutional Ownership (%) 74 Insider Ownership (%) 3 Annual Cash Dividend $1.20 Dividend Yield (%) 1.38 5-Yr. Historical Growth Rates Sales (%) 7.5 Earnings Per Share (%) 17.0 Dividend (%) 12.4 using TTM EPS 19.3 using 2015 Estimate 19.0 using 2016 Estimate 16.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Paints&Rel Prds Zacks Industry Rank * 39 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 875 A 1,031 A 1,089 A 1,108 A 4,104 A 2014 956 A 1,130 A 1,203 A 1,233 A 4,522 A 2015 992 A 1,095 E 1,195 E 1,255 E 4,537 E 2016 1,104 E 4,736 E *Note: Quarterly revenue may not add up to the annual figure due to rounding-off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 $0.60 A $0.91 A $1.07 A $0.97 A $3.54 A 2014 $0.70 A $1.07 A $1.21 A $1.38 A $4.35 A 2015 $0.85 A $1.11 E $1.29 E $1.35 E $4.60 E 2016 $0.94 E $5.19 E *Note: Quarterly EPS may not add up to the annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW The Valspar Corporation (VAL), based in Minneapolis, is a paint and coatings maker with manufacturing operations all over the world. It makes coatings for the global industrial, packaging and architectural markets. The company manufactures and distributes a broad range of products through two segments Coatings and Paints. Valspar s Coatings segment includes decorative and protective coatings for metal, wood, plastic and glass, primarily for sale to OEM customers. These products consist of primers, top coats, varnishes, inks, sprays, stains, fillers and other coatings used in a range of manufacturing industries, such as building products, appliances, furniture, transportation, agricultural and construction equipment, and metal packaging and fabrication. The company s packaging product line comprises coatings for interior and exterior use in metal packaging containers. General industrial product line, which includes a single source for powder, liquid and electrode position coatings technologies as well as coil coatings are applied to metal coils that are used to manufacture pre-engineered buildings and building components and other metal building as well as architectural products and appliances. The wood product line consists of decorative and protective coatings for wood furniture, building products, cabinets and floors. Valspar s Paints segment comprises architectural paints such as interior and exterior paints, stains, primers, varnishes and high performance floor paints; and specialty decorative products such as enamels, aerosols and faux finishes used in the do-it-yourself market. It also provides automotive refinish paints and aerosol spray paints. In addition, the company offers specialty polymers, gel coats, colorants and furniture protection plans. The products are distributed through home centers, mass merchants, hardware wholesalers, distributors and independent dealers. The company s Other and Administrative business includes resins, colorants and furniture protection plans. Valspar posted revenues of roughly $4,522 million in fiscal 2014 with Coatings and Paints segments accounting for 56% and 39%, respectively, with the Other and Administrative category representing the remaining 5%. REASONS TO BUY Valspar continues to make progress by way of winning new businesses. In 2010, the company completed the acquisition of Wattyl Limited, an Australian paint manufacturer that provides a strong brand portfolio in an excellent geography and further diversifies the company s overall sales mix. Additionally, the acquisition provides a supply chain to support its largest customer's entry into the Australian market. Moreover, the company, in January 2013, acquired the paint manufacturing assets from Ace Hardware Corporation. The acquisition will boost its retail foothold in the U.S. and offer incremental revenues from the sale of Ace-branded paints. The company now has over 3,000 Ace stores with Valspar products. Valspar also closed its acquisition of Italy-based industrial coatings maker Inver Holding S.r.l in August 2013. The acquisition is in sync with Valspar s growth strategy for its industrial coatings business and is expected to reinforce its position in the $6 billion European industrial coatings market and offer operational synergies. Valspar will leverage Inver s strong product portfolio, leading technology and distribution network to better serve its customers in Europe. Valspar s fastest-growing markets are emerging economies, such as China. The company has also purchased Canada-based coatings maker Madison Chemical Industries which will allow it to broaden its coatings portfolio into water infrastructure and wastewater management markets. Winning new businesses is a company-wide focus that will position the company well for the future and help offset Equity Research VAL Page 2
lower demand in core markets. The company expects to continue to gain from new business in fiscal 2015. Valspar initiated measures to lower its cost structure and increase the efficiency of its operations in July 2008. As part of that effort, it closed four manufacturing plants in North America followed by the closure of two additional plants in fiscal 2009. Valspar s global headcount also went down by more than 10%. The company s discretionary spending on items other than employment costs was down 10% year over year. Valspar anticipates realizing substantial savings from its restructuring efforts in fiscal 2015 and expects to implement new productivity and cost reduction programs during the year. Its restructuring actions are primarily aimed at improving manufacturing capabilities in North America following the buyout of the assets from Ace Hardware. We are optimistic on Valspar s long-term performance, which is likely to be driven by volume increases in both the paints and coatings categories. New business wins and gradually improving domestic industrial markets are expected to support volume growth in the coatings franchise. Moreover, a recovering housing market in the U.S. should aid results in paints and coatings businesses. The company s paint business is expected to benefit from expanded traction of products aimed at the affordable housing market in China. Moreover, its Love Your Color Guarantee color assurance program has been gaining favorable response in the U.S. In addition, the company s collaboration with B&Q (an operating company of Kingfisher plc), to provide a comprehensive suite of premium Valspar paint across all of its 350 locations in the U.K. and Ireland, is expected to expand its foothold in the European consumer paint market. The company has completed the launch of Valsparbranded paints in 350 retail locations in the U.K. and Ireland. Valspar has also extended its retail paint program with Lowe s to meet the needs of the professional painters. The company, through this new retail paint program, expects to reach more than 1,700 Lowe s retail locations. Moreover, the newly launched Valspar Reserve interior and exterior paints (exclusively available at Lowe s) are expected to help drive sales in the company s paint business. Valspar is aggressively investing to promote this new product. Valspar also remains committed to boost shareholder return leveraging healthy cash flows. The company has beefed up its quarterly dividend by 15% to $0.30 per share from $0.26 per share. This raised the annual dividend to $1.20 per share from the prior payout of $1.04. Separately, the company s Board approved the repurchase of shares worth up to $1.5 billion. The new repurchase authorization replaces the prior authorization of December 2012 and has no expiry date. Valspar bought back 4.7 million shares during fiscal 2014 for $349 million and retuned another $87.4 million in form of dividends. It also bought back shares worth around $84 million in the most recent quarter. REASONS TO SELL Valspar continues to witness irregular demand trends across its end markets and weakness for some of its products in overseas markets. Coatings demand for general industrial products, mainly for agricultural and mining equipment and containers, remains somewhat weak. Weakness across these product lines may sustain moving ahead. The company purchases the raw materials needed to manufacture the products from a number of suppliers. The majority of raw materials are petroleum-based derivatives and minerals and metals. Under normal market conditions, these materials are generally available from one or more suppliers in the open market. From time to time, however, the availability and costs of raw materials may fluctuate significantly, which could impair the company s ability to procure necessary materials, or increase the cost of manufacturing the products. During the past four to five years, raw material costs have been volatile, and Valspar has experienced disruptions in supplies of certain raw materials at Equity Research VAL Page 3
various times. These disruptions could affect the company s ability to manufacture products ordered by customers. When raw material costs increase, the company s profit margins are invariably reduced unless and until it is able to pass along the increases to the customers through higher prices. Many of Valspar s customers are in businesses or industries that are cyclical and sensitive to changes in general economic conditions. As a result, the demand for the company s products by these customers depends, in part, upon economic cycles affecting their businesses or industries and general economic conditions. The challenging global economic environment has had the most severe impact on its industrial product lines and customers. Downward economic cycles affecting the industries of its customers and deterioration of general economic conditions may reduce its sales and profitability. Valspar is also exposed to currency headwinds, stemming from a stronger U.S. dollar. Foreign exchange translation had a roughly 3% unfavorable impact on its sales in the most recent quarter. The company now sees its revenues for fiscal 2015 to be flat year over year (versus low single-digit growth expected earlier) factoring in the impact of a stronger dollar on its overseas sales. RECENT NEWS Valspar Beats Q1 Earnings and Revenue Estimates February 24, 2015 Valspar saw its profits jump in first-quarter fiscal 2015 (ended Jan 30, 2015) on continued momentum across its coatings businesses, strong performance in China, new business wins in many of its product lines and gains from productivity initiatives. Its profits, as reported, surged around 94% year over year to roughly $104 million or $1.24 a share. Valspar reported adjusted earnings (barring one-time items including restructuring charges) of $0.85 per share for the quarter compared with $0.70 per share earned in the year-ago quarter. Earnings topped the Zacks Consensus Estimate of $0.76. Revenues rose roughly 4% year over year to $992 million in the first quarter on gains in the company s Coatings division and also came ahead of the Zacks Consensus Estimate of $969 million. Segment Highlights Sales from Valspar s Coatings division rose 7% year over year to $586.4 million in the quarter. Net sales in local currency and volumes both were up 10%. The Paints segment's revenues moved down 1% to $359 million, while net sales in local currency increased 2%. Margins and Expenses Gross margin (as reported) improved to 33.6% in the reported quarter from 33.3% a year ago. Operating expenses went up 0.2% year over year to $223.9 million. Sale of Non-Strategic Assets Valspar completed the sale of certain assets related to a non-strategic product in its Coatings segment during the reported quarter. The company recorded the asset sale in the first quarter, which included a pre-tax gain of roughly $48 million to reported income from operations. Equity Research VAL Page 4
Financials Valspar ended the quarter with cash and cash equivalents of $191.8 million, down around 0.4% year over year. Total long-term debt rose 33.4% year over year to $1,350 million. Guidance Valspar reiterated its fiscal 2015 earnings per share (as adjusted) guidance of $4.45 to $4.65. Due to the impact of a stronger U.S. Dollar, Valspar updated its fiscal 2015 sales guidance and now sees roughly flat sales on a year over year basis versus the previous guidance of low single-digit growth. Valspar Q4 Earnings & Revenues Top Estimates, Profits Rise November 25, 2014 Valspar saw its profits jump in fourth-quarter fiscal 2014 (ended Oct 31, 2014) on continued momentum across its coatings businesses, backed by higher volumes and strong performance across all its product lines. Its profits, as reported, surged around 70% year over year to roughly $108.1 million or $1.28 a share. Valspar reported adjusted earnings (barring restructuring charges) of $1.38 per share for the quarter, compared to $0.97 per share in the same quarter a year ago. It topped the Zacks Consensus Estimate of $1.15. For fiscal 2014, adjusted earnings were $4.35 per share, coming ahead of the Zacks Consensus Estimate of $4.12. Revenues rose roughly 11.3% year over year to $1,233 million in the fourth quarter on gains across the company s Paints and Coatings divisions and strong performance across international regions. Revenues also came ahead of the Zacks Consensus Estimate of $1,191 million. For fiscal 2014, revenues increased 10.2% year over year to $4,522.4 million, beating the Zacks Consensus Estimate of $4,478 million. Valspar reported record sales and earnings in fiscal 2014. Segment Highlights Sales from Valspar s Coatings division rose 15% year over year to $694 million in the quarter on the back of contributions from packaging, general Industrial and coil. Sales, excluding the acquisitions, rose 11% with volumes moving up in high single-digits. The Paints segment's revenues moved up 7% to $479 million on volume gains across all regions. Sales rose in the high single-digits. Margins and Expenses Gross margin (as reported) improved to 34.3% in the reported quarter from 32.1% a year ago. Operating expenses went up 1.1% year over year to $259.8 million. Dividends and Share Buybacks Valspar s board has cleared a 15% hike in its quarterly dividend to $0.30 per share, payable on Dec 19, 2014, to shareholders of record as of Dec 8, 2014. It had already paid a quarterly dividend of $0.26 per share in the fourth quarter. Equity Research VAL Page 5
Valspar s board also approved a new share repurchase program, authorizing the company to buyback up to $1.5 billion of its outstanding shares. This program has no expiry date and replaces the previous repurchase program of Dec 2012. Financials Valspar ended the quarter with cash and cash equivalents of $128.2 million, down around 41% year over year. Total long-term debt declined 8.4% year over year to $950 million. Guidance Valspar expects sales growth for fiscal 2015 to be in the low single-digits. The company s adjusted earnings guidance for fiscal 2015 is in the range of $4.45 to $4.65 per share. VALUATION Valspar s current trailing 12-month earnings multiple is 19.3X, compared to the 21.7X average for the peer group and 18.5X for the S&P 500. Over the last five years, the company s shares have traded in a range of 13.1X to 21.5X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on the estimated earnings for fiscal 2015 and 2016. Our Neutral recommendation on the stock indicates that it will perform in line with the market. Our price target of $92 is based on 20x our fiscal 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The Valspar Corporation (VAL) 19.0 16.8 N/A 15.4 19.3 21.5 13.1 Industry Average 22.5 19.5 11.7 17.3 21.7 26.0 13.6 S&P 500 16.8 15.7 10.7 14.9 18.5 18.4 12.0 The Sherwin Williams Company (SHW) 26.0 22.7 14.2 26.2 32.7 32.0 15.7 Corimon (CMNFY) RPM International Inc. (RPM) 22.4 18.8 9.7 17.8 23.5 23.4 12.3 Chase Corporation (CCF) 10.5 16.2 16.3 7.3 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA The Valspar Corporation (VAL) 7.4 7.4 1.8 37.7 1.4 1.4 12.7 Industry Average 10.5 10.5 10.5 34.7 0.8 66.0 13.6 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research VAL Page 6
Earnings Surprise and Estimate Revision History Equity Research VAL Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of VAL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.5%, Neutral - 75.6%, Underperform 8.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research VAL Page 8