Peter Lynch always said that boring companies are worth investigating because they are often underfollowed despite having solid businesses that have strong growth. And because they don’t attract attention, they may be undervalued.
That brings us to The Valspar Corporation (VAL). As boring as it is, it has a pretty deep reach, due to its 206-year-old history. VAL stock is in the coatings and paints business. Most people attribute coatings to things like varnishes and stains, but coating applications involves rather sophisticated chemical techniques.
Coating aren’t just applied to wood; they’re also used in the manufacturing space, as well as in agriculture, transportation, metals, and appliances. Even construction equipment requires various types of coatings. Paints are what you’d expect, and don’t have quite the same depth of market penetration.
VAL stock manufactures materials, but it also handles the high-margin distribution business. Distribution is where the big money is, provided your operation is efficient and has multiple centers from which deliveries can be made with haste, and that you stock your products properly. In the last two centuries Valspar has had plenty of time to optimize its network.
The company reported solid earnings this week. Net income rose 12% year-over-year to $86 million (or 99 cents per share). However, if you back out one-time charges, it was actually $1.07 per share, which beat analyst estimates by three cents. The income jump came on a sizable 10% revenue increase.
The Coatings side drove the ship with a 12% sales increase. Some of this came as a result of continued improvement in housing, although I believe the housing market is seeing more strength from speculation. Not that it matters to Valspar. Coatings are coatings, no matter how the house sells. Over on the Paints side, revenues increased 8%. Some of this was driven by a new deal Valspar struck with Ace Hardware to offer its products in its 3,000 stores.
While gross margins increased to 33.7%, operating expenses increased 14%. I prefer to see those expenses increase no faster than sales, which makes that number something to watch for. VAL stock has $116 million in cash offset by about $1.1 billion in debt.
The company is also moving its “reserve interior and exterior paints” into Lowe’s (LOW) exclusively. To quote the CEO, “Valspar Reserve outperforms competitive products at similar price points based on attributes that matter most to consumers. Reserve incorporates our most advanced color technology and offers best-in-class durability.” He certainly seemed excited by this move, and I don’t blame him. Getting shelf space at the second-largest home retailer in the country is a terrific move.
VAL stock trades at about 18 timesFY14 estimates of $4.08. Even accounting for the 1.4% yield, it’s a tad bit pricey at 14% long-term EPS growth. But let’s look at competitors. PPG Industries (PPG) trades at 21 times earnings on 11% long-term growth. Sherwin-Williams (SHW) trades at 24x earnings on 14.6% long-term growth. Akzo Nobel (AKZOY) trades at 16 times earnings on 11% growth.
Basically, if you want to get into the coatings and paint stock business, VAL is the least expensive and closest to fair value, with solid growth ahead.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
