Valspar Paints A Pretty Picture

By Will Ashworth | March 30, 2012 AAA
According to Global Industry Analysts Inc., the global coatings market is expected to reach $107 billion by the year 2017, if not sooner. One of the big beneficiaries of this growth is Minneapolis-based Valspar (NYSE:VAL), the sixth largest manufacturer of paints and coatings, something it's been doing since 1806. Valspar's continuing move into emerging markets such as Asia and elsewhere is going to pay big dividends for the company in the years to come, even with its stock being up over 25% year-to-date and roughly 141% in the past three years.

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Valspar and Peers

Company

EV/EBITDA

Valspar

10.20

Akzo Nobel (OTCBB:AKZOY)

7.01

PPG Industries (NYSE:PPG)

7.68

Sherwin-Williams (NYSE:SHW)

12.92

E.I. Dupont (NYSE:DD)

8.91

Consistent Management

Since 1973, Valspar's has had just four CEOs. Angus Wurtele, who took the helm after Valspar merged with Minnesota Paint, was CEO for 22 years until 1995 and a member of the board until February 2000. Wurtele still owns 6.1% of its stock. Current CEO Gary Hendrickson took over in June 2011, upon the retirement of former CEO Bill Mansfield. It's no wonder then that its stock's performance has been remarkably consistent over the past decade. Since 2002, it's had negative annual returns on just two occasions. In 2008, when the S&P 500 lost roughly 37%, it lost just 17.2%. It's currently working on its seventh year of double-digit returns in the past 11. It seems you can count on Valspar to be consistent in its approach to business.

SEE: Why Do Companies Care About Their Stock Prices?

Cash Flow

In the last five years (2007-2011), Valspar generated roughly $746 in free cash flow. It expects to generate almost double that amount in the next five. With approximately $450 million dedicated to capital expenditures and another $450 million for dividends, it expects to have $1.4 billion available for acquisitions, share repurchases and to a lesser extent, debt repayment. That's because it was able to sell $400 million in unsecured senior notes in January that don't mature until January 2022 and carry a coupon rate of 4.2%. This will allow it to retire $200 million of senior notes at about 5.63% interest, lowering its average borrowing cost per dollar. It finished the quarter with a debt-to-capital ratio of 51.2%, which is reasonable given the cash flow it will generate this year and beyond.

In the first five years (2007-2012), it spent $256 million more than its free cash flow on acquisitions and share repurchases. If it does the same in the next five, it will have about $398 million to spare. That certainly gives it some flexibility when it comes to acquisitions. In February, Hendrickson indicated Valspar wouldn't be bidding for Dupont's coatings business, which is expected to fetch as much as $3 billion. The deal would add a whack of debt to its balance sheet. Furthermore, even though it would double its size in terms of revenues, it would still be smaller than Sherwin-Williams, PPG Industries and Akzo Nobel. I think it's a wise move taking a pass. No sense mortgaging the farm if it's not going to move ahead in terms of market position. Cash isn't a bad thing to hang onto sometimes.

Growth Markets

In 2011, 27% of company revenue came from high-growth markets in Asia Pacific and another 5% from Latin America. Add in 14% from Europe and another 2% from Canada, and it generated approximately 48% of its overall revenue outside its stronghold in the U.S. Five years ago, it generated just around 37% internationally. A couple more acquisitions combined with some organic growth and that number could be as high as 60% in another five years. More important than the increased revenues are the improved margins these growth markets will deliver. For example, the first quarter of fiscal 2012 saw operating margins improve 270 basis points to 10.2%. While a big part of the increase is due to the success of its coatings segment, I think it's safe to assume that Valspar's international coatings business had a big part in that success.

SEE: A Look At Corporate Profit Margins

The Bottom Line

In February when it announced Q1 earnings, it raised 2012 full-year earnings guidance between $2.92 and $3.12 a share. Its stock might not be the cheapest of its peers, but it's certainly one of the most consistent, and that comes from thoughtful, stable management. For this reason alone, you should consider Valspar. Long-term, it won't let you down.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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