3 Reasons to Get Serious About This Stock Now


The tables seem to be turning now. Paint companies, which were buckling under the burden of high input costs, are now rocking the Street with outstanding numbers.

Valspar (NYS: VAL) has surprised all with its solid fourth-quarter numbers. Is it time to take the optimism more seriously? Yes, I think so.

Great going!
Valspar's revenues shot up 19.4% from the year-ago quarter to $1.05 billion, but it came up with a loss of $295.7 million. What's good about that, you ask? Well, the good part is that these losses aren't the result of core operations.

A goodwill-impairment charge of $363.4 million dented its bottom line. If you exclude this, the company came up with adjusted earnings per share of $0.84, a superb 50% jump from last year. This comes as a pleasant surprise after the distasteful dip in its third-quarter bottom line and also considering that input prices haven't taken a breather yet.

What's impressive is the jump in Valspar's revenues. While acquisitions contributed 11.3% to the revenue growth, higher selling prices played a significant part, too, adding 5% to the rise. This comes as no surprise, considering how furiously the paint maker has been passing the buck onto its customers. This factor played an equally big role in taking peer Sherwin-Williams' (NYS: SHW) third-quarter revenues to record highs. Same goes for RPM International (NYS: RPM) , which saw its first-quarter revenues climb 10.2% year-on-year as selling prices rose.

The game continues...
The concerns of paint makers mirror each other. Like Sherwin, Valspar's worried about the time lag between raw material costs rising and price hikes being implemented. In addition, raw material producers are in no mood to jump off the price-increase bus so soon.

Think of companies that are into chemicals like titanium dioxide (TiO2), which is an important raw material for paints, and you'll know what I am talking about. Two days ago, DuPont (NYS: DD) announced fresh price hikes for TiO2 products, effective January 2012. Huntsman (NYS: HUN) , which made a lot of money from high prices in its last quarter, has also announced similar hikes.

With many similar stories around, you can imagine how these hikes will continue to hit paint makers. So, what is their plan now? It's the same "I'll pinch customers every time suppliers pinch me" game. Valspar isn't writing off the possibility of further price actions. Neither is Sherwin, which announced hikes last month, nor is RPM, which has pursued the price-hike strategy so intently.

Gaining ground
Valspar's acquisition of Brazil-based Isocoat earlier in the year has given the company a stronger foothold in Latin America. This, along with Valspar's presence in other developing markets like Asia, should keep demand strong.

The great part is that Valspar knows this well, which is why it is investing to expand existing plants and to even build a new plant in China. These moves should add good value to Valspar's business.

The Foolish bottom line
Valspar management's expectation of 2012 adjusted earnings is way above estimates. Growing revenues and business expansions in lucrative areas should pave the way for a great future. What's more, you also have a good dividend yield of 2.10% here.

I had written some time back about how I think Valspar could be a value pick. The strong fourth quarter only compels me to reiterate my views. Add higher sales for home improvement retailers and hopes of a housing recovery, and Valspar could charge ahead very speedily. Don't forget to add it your stock watchlist -- our free, personalized stock-tracking service. It's the best tool to keep you updated not just on Valspar, but on all the companies you love.

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of 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.

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