It’s Time to Brush This Stock Aside
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you had invested $100 in this specialty chemicals stock a year back, you would be sitting on nearly double the money right now. Valspar’s (NYSE: VAL) wild run has taken its shares to a new 52-week high, leaving many red in the face for having missed the rally.
While many feel a housing rebound should keep pushing its shares higher, I am not too keen on this. Valspar is growing as a company, but housing is still largely in dumps, and challenges are aplenty.
So far, so good …
Not many complained about Valspar’s last-quarter performance – its sales remained flat while net profits climbed nearly 28% from the year-ago period. Yet, a look at its overall performance in the past twelve months leaves much to be desired.
| Company | Profit margin | Operating margin | Return On Equity |
| Valspar | -1.9% | 12.2% | -5.5% |
| Sherwin-Williams (NYSE: SHW) | 5.6% | 9.6% | 31.8% |
| PPG Industries (NYSE: PPG) | 6.0% | 11.8% | 25.8% |
| RPM International | 5.7% | 10.2% | 17.2% |
Source: Yahoo! Finance
But don’t be mistaken, because numbers that meet the eye aren’t always true. Valspar’s bottom line actually grew steadily year-over-year in its last three quarters, save for the fourth quarter last year when a huge one-time impairment charge pushed its bottom line into the red. Restructuring helped the company get rid of unprofitable assets and reduce costs.
If cost-cutting initiatives in trying times are impressive, so are Valspar’s growth moves. The company has been expanding aggressively in overseas markets (they now account for as much as 48% of total revenue) which should fuel growth in the years to come. But as of now, the road ahead isn’t clear of bumps.
…but where are the growth catalysts?
Valspar raised its full-year earnings guidance during its second quarter, and I feel related bullishness has already been factored in the company’s share prices as I can’t really see any major growth catalyst at least in the near future. Whatever growth the top line has seen is primarily on the back of higher selling prices and not volumes, which I feel isn’t sustainable in the longer run.
Valspar itself is somewhat cautious for the rest of the year, a feeling it shares with its main customer Lowe’s. The home-improvement retailer, which accounted for more than 10% of Valspar’s total sales last year, surprised many with its dismal performance in the last quarter. Lowe’s expectations of flat full-year net and same-store sales don’t help much either.
The paint maker needs to deal with another challenge -- high input costs. Prices of key raw material, titanium dioxide, remain too high for comfort. Players across the paint industry bore the brunt of soaring costs, and passed it on to consumers in desperation. Prices took a breather in recent months, but they still remain at exorbitant levels compared to prices prevalent a couple of years ago. Sherwin-Williams’ management mentioned how most of the company’s cost pressures continue to come from TiO2, and that it does not expect prices to stabilize so soon. Some like PPG are even trying to reduce consumption of the pigment through a shift in paint formulations. With TiO2 king DuPont expecting an uptick in volumes and demand for the pigment in the forthcoming quarters, chances of further price hikes can’t be ruled out.
It’s particularly tough for Valspar as it derives more than 40% of sales from its paints segment which is directly affected by TiO2 prices. Even a small increase in the pigment’s price, and Valspar’s margins could feel the pressure.
The Foolish bottom line
What Valspar could probably do to maintain shareholder’s enthusiasm is give its dividends a boost. Although the company has consistently increased dividends for 34 years, yield of 1% leaves investors dissatisfied. Based on its current valuations and not-so-impressive top and bottom line growth, Valspar doesn’t win my best-bet vote in its industry at current price.
But there’s another specialty chemical company that has also hit its 52-week high recently, and scores more than Valspar because of its super dividends and better valuations. I’ll soon tell you which one is it. To make sure you do not miss out, click here to add Valspar to your personalized stock watchlist, and keep watching this space.
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Nehams has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
