Valspar (VAL)

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The Valspar Corporation (VAL) makes industrial, packaging, automotive, and house paints^[1], 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. ^{[citation needed]} 90% of Valspar's 2007 revenues came from the sales of paints and finishes, which are all made of petrochemicals. In 2007, despite a 9.1% increase in sales to $3.25 billion, a rise in the price of petrochemicals (combined with the slumping US housing market) caused a decline in net income from $175.3 million in 2006 to $172.1 million.^[2]

In recent years, Valspar has been growing its international business rapidly, with a focus on emerging markets. In 2007, international sales grew by 34% (80% in Asia alone), accounting for 37% of the year's revenues.^[3] 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. ^{[citation needed]} Much of this is a result of the company's strategy to use acquisitions as a means of growth. In the last three years alone, Valspar has spent roughly $500 million to buy companies in high-growth economies.^[4] In 2007, Valspar bought firms in Brazil, China, Eastern Europe, and Central Europe.^[5]

[edit] Company Overview

Valspar is the sixth largest producer in the coatings and paints industry and has sales in more than 80 countries.^[6] 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.

Google Finance^[7]

Valspar Annual Report 2007^[8]

[edit] Business Financials and Metrics

Over the past three years, Valspar's revenues have increased from $2.71 billion in 2005 to $3.25 billion in 2007. The main drivers behind this growth have been an increasing international presence and acquisitions of other companies. ^[9]

[edit] Business Segments

• Coatings (57% of 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. The Coatings segment saw revenue growth of 10% in 2007.^[10]

• Paints (34% of sales)

The Paints segment produces automotive, architectural, and spray paints, which are distributed throughout a variety of retail stores. ^[11] Its line of house paints, for example, can be found at stores such as Lowe's (LOW) and Wal-Mart (WMT).^[12] Net sales of the Paints segment increased 10.5% from $1.09 billion in 2007 from $985.7 million in 2006. Excluding the favorable impact of the Huarun acquisition (a China-based paint and coating company) and foreign currency, net sales growth in the Paints segment was -1.3%. The decrease was primarily driven by weakness in the U.S. residential construction and housing markets which affected sales in the architectural product line.^[13]

• Other (10% of sales)

The Other segment produces specialty polymers, composites, and colorants for use by coatings manufacturers and others, as well as furniture protection plans.^[14]

[edit] Key Trends and Forces

[edit] US Housing Market Weakness

Existing home sales decreased by 20% in 2007, compared to the previous year, and new home sales dropped to their lowest annual volume since April 1995.[7] 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. In 2007, the downward trend in the U.S. housing market negatively affected sales of Valspar's architectural paints and other coatings applied to consumer products used in the home. 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. Adjusted for the positive effects of currencies and acquisitions, sales grew just 0.4% from the prior-year period. 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. ^[15]

[edit] Valspar Is Susceptible to Volatile Price Variations in Petrochemicals

Valspar's cost of goods sold is essentially made up of petrochemicals (80% of COGS in 2007).^[16] 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. At times, its prices have been more volatile than those of oil.^[17] This volatility is still present as Valspar has been dealing with increasing petrochemicals costs throughout 2008.^[18]

[edit] 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. As of the end of 2007, Valspar was still involved in a series of ongoing claims concerning waste disposal at a number of their current and former plants.^[19] Also, since the beginning of 2008 the company has had two lawsuits filed against it over enviornmental matters; two were filed by the federal government and one by the state of Connecticut.^[20] 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.

[edit] Competition

For comparison purposes, Valspar generated roughly $3.25 billion in revenues in 2007.

• PPG Industries (PPG) : 2007 revenue - $11.2 billion. 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.^[21] 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) : 2007 revenue - €10.2 billion^[22] ($13.98 billion based on the average 2007 exchange rate). 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. ^[23] Because of its revenues, Akzo Nobel also has an economies of scale advantage over Valspar.

• Sherwin-Williams Company (SHW) : 2007 revenue - $8 billion. 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.

[edit] References

1. ↑ SEC Filings, "Valspar 2007 10-K"
2. ↑ Valspar Annual Report 2007 pg. 4, "Letter to the Shareholders"
3. ↑ Valspar 2007 Annual Report pg. 9, "Growing in International Markets"
4. ↑ Valspar 2007 Annual Report pg. 10, "Strategic Acquisitions, Market Leadership"
5. ↑ Valspar 2007 Annual Report pg. 14-15, "Coatings and Paints"
6. ↑ Ben Johnson, "Valspar 3Q Reports", Stock Analysis, Morningstar
7. ↑ Google Finance, "Financial Statements for the Valspar Corporation"
8. ↑ Valspar Annual Report 2007 pg. 15, "Segment Overview"
9. ↑ Valspar Annual Report 2007 pg. 4, "Letter to the Shareholders"
10. ↑ Valspar Annual Report 2007 pg. 4, "Letter to the Shareholders"
11. ↑ Reuters.com, "Valspar Company Profile"
12. ↑ Google Finance, "Valspar Corporation"
13. ↑ SEC Filings, "Valspar 2007 10-K"
14. ↑ SEC Filings, "Valspar 2007 10-K"
15. ↑ SEC Filings, "Valspar 2007 10-K"
16. ↑ Ben Johnson, "Valspar 3Q Reports", Stock Analysis, Morningstar, 2 September 2008
17. ↑ Platts, "Insight"
18. ↑ Ben Johnson, "Valspar 3Q Reports", Stock Analysis, Morningstar, 2 September 2008
19. ↑ Yahoo! Finance, "Valspar 10-K 2007"
20. ↑ Justia.com, "Federal District Court Filings and Dockets"
21. ↑ Reuters.com, "PPG Company Profile"
22. ↑ Akzo Nobel, "Annual Report 2007"
23. ↑ Google Finance, "AKZOY"