Insider Buying at This Coatings and Paints Company

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Valspar (NYSE: VAL) was up about 13% for the year in late May, but over the last month the $5.5 billion market cap coatings and paints company has given up all of those gains. The primary culprit for the decline would appear to be the decision to acquire European coatings manufacturer Inver Group. The business is fairly small relative to Valspar, but investors may still be concerned about integration risks. In addition, the company’s financials for the second quarter of its fiscal year (the quarter ending in April) showed flat performance versus a year earlier.

A member of Valspar’s Board of Directors, John Ballbach, seems to be more confident in management’s decisions. He directly acquired nearly 2,100 shares of stock on June 21, nearly doubling his holdings to a total of about 4,800 shares. The purchases took place at an average price of $65 per share, above where Valspar currently trades. We track insider purchases because our analysis of insider activity shows that there is a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading at Insider Monkey); our theoretical explanation for this is that insiders should prefer to diversify their wealth unless they are confident that the company’s stock is undervalued.

As we’ve mentioned, there was little change in Valspar’s revenue or earnings in its most recent quarter compared to the same period in the previous year, and the same had been the case for fiscal Q1. Over this time a decline in the coatings business has been offset by growth in paints, which might be attributed to a rise in the U.S. housing market; a majority of the company’s total revenue is domestic. Wall Street analysts expect EPS to improve considerably this year and next year, and the stock trades at 14 times forward earnings estimates.

In addition to insider activity, we also monitor quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that 13Fs can be useful sources of information for developing investment strategies. We can also use this database to track interest in individual stocks, and can see that billionaire Ken Griffin’s Citadel Investment Group owned a little over 1 million shares of Valspar as of the end of March (see Griffin's stock picks).

The Competition

The closest peers for Valspar are PPG Industries (NYSE: PPG) and Sherwin-Williams (NYSE: SHW). PPG has been seeing a temporary bump in earnings, going by recent reports; according to sell-side forecasts, the forward P/E is 16 representing a small premium to Valspar. With its revenue actually flat in the first quarter of 2013 versus a year earlier, we aren’t sure that the $21 billion market cap company is a buy, particularly as it focuses on coatings, which we’ve seen have been a weak point in Valspar’s business. Markets are quite excited about Sherwin-Williams, and as a result its stock price has been bid up to trailing and forward earnings multiples of 28 and 19 respectively. While the company’s net income has been up, its sales numbers have also been lukewarm and given the high valuation we think that we would avoid the stock.

To the extent that Valspar might be tied to housing and home improvement, it can also be compared to Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). These two stocks are priced essentially even with each other; for purposes of comparison, Lowe’s is valued at 16 times consensus earnings estimates for the forward fiscal year while Home Depot’s P/E on the same basis is 17. The retailers have beaten the market over the last year, though only Home Depot seems to be actually generating growth in its business: its earnings grew by 19% last quarter compared to a year ago, with a good deal of that strength coming from higher sales, while Lowe’s experienced little change on either top or bottom line over essentially the same period.

Bottom Line

We’ll note the insider purchase at Valspar, but we don’t recommend imitating it. The integration risks probably aren’t too significant, but they are there, and in addition we aren’t excited about the company’s most recent 10-Q. Of course, Valspar is valued at a discount to many of its peers, but as a value prospect it is quite dependent on paint, and by extension the housing market, and Home Depot may be a purer way to play that thesis at a slightly higher forward P/E.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Home Depot, Lowe's, and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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