How High Can Valspar Go?
Shares of Valspar (NYS: VAL) hit a 52-week high yesterday. Let's look at how it got here and whether clear skies are ahead.
How it got here
The past year has been kind to paint maker Valspar. The company's restructuring to focus on higher-margin paints has paid off, and improved financial results have been followed by a rising stock price. In the fiscal second quarter, the company saw revenue rise just 4% to $1.03 billion, but adjusted net income per share jumped 31% to $0.84, and the company raised fiscal 2012 earnings guidance to $3.20 to $3.30 per share.
A slow recovery of the housing market hasn't hurt the market dynamic either. After years of declines, new home sales recently posted an impressive gain to the highest level in more than two years. Retailers for do-it-yourselfers such as Home Depot (NYS: HD) and Valspar's partner Lowe's (NYS: LOW) have also experienced a rise in sales as consumers put a new splash of paint on their homes.
Valspar isn't the only one in paint and coatings enjoying a strong year, though. Competitor Sherwin-Williams (NYS: SHW) is also around a 52-week high and coatings maker PPG Industries (NYS: PPG) has had a positive run as well.
VAL data by YCharts
Earnings have made a dramatic improvement at the two major paint makers, Valspar and Sherwin-Williams, and margins have improved as well.
Company | Price/Book | Operating Margin | Quarterly Earnings Growth | Forward P/E |
|---|---|---|---|---|
Valspar | 4.0 | 11.6% | 35.9% | 14.2 |
Sherwin-Williams | 8.8 | 9.1% | 45.7% | 17.3 |
PPG Industries | 4.8 | 11.5% | (94.3%) | 11.6 |
Source: Yahoo! Finance.
Despite the recent growth, these stocks are still trading at forward earnings multiples in the teens. This may give investors enough value to consider adding shares even after the recent rise.
What's next?
I'm not sure if the new home sales numbers will continue to improve, but I like where paint makers like Valspar sit in the housing market. They aren't dependent on new or existing home sales but will benefit if either improve. With the top 90% of the economy appearing to be in a relatively healthy place, I think that can bring us to a steady improvement for Valspar.
The CAPS community thinks the stock has higher to run as well. The company has a four-star rating (out of five), and our All-Stars have given the stock an outperform rating 37 times to just one underperform rating.
Valspar may not keep up its torrid pace in coming months, but the improved profitability and steady growth have me believing the stock can continue to move higher.
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At the time thisarticle was published Fool contributor Travis Hoium has plain white walls and does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Motley Fool newsletter serviceshave recommended buying shares of Sherwin-Williams and Home Depot. Motley Fool newsletter services have recommended writing covered calls on Lowe's Cos. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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