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WIKI ANALYSIS
The Valspar Corporation (NYSE:VAL) makes industrial, packaging, automotive, and house paints, which can be found on everything from heavy machinery to soda cans. It is the world's number one supplier (in terms of sales) of wood coatings. 92.2% of Valspar's 2009 revenues came from the sales of paints and finishes, which are all made of petrochemicals.[1]
In recent years, Valspar has been growing its international business rapidly, with a focus on emerging markets. In addition to becoming the leading supplier by sales of wood coatings in China, Valspar has become the number one supplier of packaging and coil coatings in Latin America. Much of this is a result of the company's strategy to use acquisitions as a means of growth.In recent years, Valspar has spent roughly $500 million to buy companies in high-growth economies.
Company Overview
Valspar is the sixth largest producer in the coatings and paints industry and has sales in more than 80 countries.[2] It makes finishes for everything from houses to cars to food packaging. These coatings/paints are either sold directly to a manufacturer or through a retail store.
Business Financials and Metrics
Prior to 2009, Valspar had steady revenue growth for well over a decade. However, total revenues declined in 2009, from $3.5 billion in 2008 to $2.9 billion in 2009. However, its net income increased from $151 million in 2008 to $160 million in 2009.
Business Segments
Coatings (55.0% of 2009 sales)
The Coatings segment produces decorative and protective finishes for a variety of materials including glass and metal. These finishes are mainly sold to original equipment manufacturers for use on product packaging, pre-engineered buildings, appliances, roofs, wall panels, floors, furniture, and more. In 2009, this segment earned $1.6 billion in total revenues.[1]
Paints (37.2% of 2009 sales)
The Paints segment produces automotive, architectural, and spray paints, which are distributed throughout a variety of retail stores. Its line of house paints, for example, can be found at stores such as Lowe's (LOW) and Wal-Mart (WMT). In 2009, this segment had total revenues of $1.1 billion.[1]
Other (7.8% of 2009 sales)
The Other segment produces specialty polymers, composites, and colorants for use by coatings manufacturers and others, as well as furniture protection plans.
Key Trends and Forces
US Housing Market Weakness
Existing home sales have declined since 2007, and new home sales dropped to their lowest annual volume since April 1995. A significant decrease in the quantity of homes sold results in a decrease in touch-up painting by the seller and remodeling painting by the new resident. Downward economic cycles affecting the industries of their customers will reduce sales of their products. For instance, the volume of coatings for home appliances has begun to soften. This anemic internal sales growth can be attributed to ongoing weakness in North American residential construction, which has been particularly harmful for sales of wood coatings.
Valspar Is Susceptible to Volatile Price Variations in Petrochemicals
Valspar's cost of goods sold is essentially made up of petrochemicals. This means that the company is at the whim of any price increases that may occur in petrochemicals. If prices rise, Valspar has no alternative material that can be used. In fact, petrochemical prices have been very volatile during the past several years, and as such may greatly impact VAL's earnings.
Potential Environmental Litigation Problems Could Increase Expenses
There have been several environmental claims made against Valspar and some of its closest competitors, such as Sherman Williams. If these claims go to court, Valspar would find itself with legal expenses that would only erode its net profit margin. Also, since the beginning of 2008 the company has had two lawsuits filed against it over environmental matters; two were filed by the federal government and one by the state of Connecticut.[3] If the company is found liable in any of these matters it will have not only legal expenses, but also expenses related to cleaning up the area.
Competition
- PPG Industries (PPG) : PPG is a direct competitor to Valspar. In addition to making a variety of paints and coatings, PPG also manufactures optical materials, glass, and commodity chemical materials.[4] As evidenced by their revenue total, PPG has an advantage in terms of economies of scale, which is important in this industry because there is little product differentiation and all companies are buying the same raw materials.
- Akzo Nobel N.V. (AKZOY) : Akzo Nobel is another direct competitor to Valspar, producing decorative and performance coatings for a variety of end users. Like PPG, Akzo Nobel is also a supplier of specialty chemicals. It is a holding company and both bought and sold companies during 2007. [5] Because of its revenues, Akzo Nobel also has an economies of scale advantage over Valspar.
- Sherwin-Williams Company (SHW) : Sherman-Williams is the largest US producer of architectural paints by revenue. The company also produces coatings for automobiles and planes. In addition to selling its products through third parties, Sherman-Williams also has its own retail stores.
References
- ↑ 1.0 1.1 1.2 VAL 10-K 2009 Item 1 PG. 1
- ↑ Ben Johnson, "Valspar 3Q Reports", Stock Analysis, Morningstar
- ↑ Justia.com, "Federal District Court Filings and Dockets"
- ↑ Reuters.com, "PPG Company Profile"
- ↑ Google Finance, "AKZOY"
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