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Summary

  • Valspar has a strong track record of revenue growth and strong operating margins.
  • As the share price performance results in little appeal being left.
  • Forcing me to stay on the sidelines awaiting better entry levels.

Global paint and coating company Valspar (NYSE:VAL) released its second-quarter earnings report at the start of the trading week.

The company has again demonstrated solid revenue and earnings growth, like it has done over the past decade. Yet after a great run-up in its shares, I remain cautious with shares currently trading at elevated valuation levels.

Second Quarter Headlines

Valspar reported a 9.6% jump in second-quarter revenues which came in at $1.13 billion. Reported earnings rose by 11.8% to $86.0 million.

As a result of sizable share repurchases, earnings per share rose by 17.9% to $0.99 per share on a diluted basis. Adjusted earnings came in at $1.07 per share.

Looking At The Operations

Sales of paints were up by 8% to $472 million driven by higher volumes in the US, China and Australia. Reported EBIT of $56.8 million, or 12.0% of sales, is lower compared to last year on the back of higher advertising and marketing efforts.

Coating sales were up by 12% to $603 million, yet excluding acquisitions sales would have been up by just 4%. EBIT margins improved to 16.0%, coming in at $98.0 million.

The company reported an overall 90 basis point jump in gross margins which expanded to 33.7% of sales. These margin gains were largely offset by a 80 basis point increase in operating expenses which rose to 21.0% of sales. Notably marketing efforts increased while R&D budgets rose just slightly.

Valuation

Valspar ended the quarter with $119.5 million in cash, equivalents and restricted cash. Total debt stands at $1.65 billion which results in a rather sizable $1.5 billion net debt position.

For the full year, Valspar reiterated its outlook for adjusted earnings of $3.95 to $4.15 per share.

At $74 per share, Valspar is valued at $6.3 billion. This values equity in the business at 1.4 times annual revenues forecasted around $4.5 billion. The company is valued at 18-19 times adjusted earnings foreseen for the year.

The quarterly dividend of $0.26 per share provides investors with a 1.4% dividend yield per annum.

Implications For Investors

Valspar operates in a roughly $100 billion global coating market as outlined in an investor presentation in November of last year. Despite being a sizable business, major competitors Akzo Nobel (OTCQX:AKZOY) and PPG Industries (NYSE:PPG) are roughly three times the size of Valspar.

Valspar has reasonable diversification between the coating and paints business. In terms of geographical diversification, the company still generates half of its revenues in the US. A 10% share in China is attractive, but its presence in Europe is rather weak.

The company has been aggressive in expanding its business in recent times. Last year it has signed agreements with ACE Hardware and Lowe's (NYSE:LOW) to sell its paint in respectively 4,000 and 1,700 retail stores.

These initiatives underlie the long-term track record of growth, with Valspar recording 6% cumulative annual growth between 2003 and 2013. The company managed to do this while improving EBIT margins to superior levels, even in comparison to the market leaders.

While all of this sounds very promising, unfortunately the good news has been reflected into the share price already. Between 2003 and 2011, shares largely traded in a $15-$35 price range. On the back of the market rally and US housing recovery, shares have advanced to $75 per share which makes shares not appealing at premium valuation levels. This is despite having sizable Chinese activities.

I remain on the sidelines.

Source: Valspar - Growth And A Great Track Record Comes At A Too Steep Price