APFC American Pacific Corp. (MM)

We have reaffirmed our Neutral recommendation on paints and coatings maker Valspar Corp. (VAL) following its mixed second-quarter fiscal 2013 results. While we are encouraged by the recovery in its paint business, an uncertain demand environment keeps us on the sidelines.

Why Retained?

Adjusted earnings for the second quarter, reported on May 14, beat the Zacks Consensus Estimate while sales miss. Valspar witnessed a recovery in its paint business in the quarter, driven by a rebound in the domestic housing market. The company backed its earnings forecast for fiscal 2013.

Valspar has a strong pipeline of new products and significant opportunities for share gains in both its Paints and Coatings segments. The company is managing its cost well and maintaining a cost structure that is appropriate for the current external environment. Valspar should also benefit from its restructuring actions in fiscal 2013.

Winning new businesses also remains a company-wide focus that will position Valspar well for the future and help it offset lower demand in core markets. Its fastest growing markets are the emerging economies. The company expects to gain from new businesses in consumer paints, packaging, coil and wood coatings in second-half fiscal 2013.

Valspar also remains committed to boost shareholder return leveraging healthy cash flows. In addition, it is making good progress with the integration of the acquired assets from Ace Hardware Corporation.

However, Valspar continues to witness irregular demand trends across its end markets and weakness for some of its products in overseas markets. It continues to see weak coatings demand for general industrial products. The overall demand environment is expected to be uneven in fiscal 2013.

We also remain cautious about cost pressures associated with raw material inflation. Raw material costs have been volatile and Valspar has experienced disruptions in supplies of certain raw materials at various times, impacting its ability to manufacture products.

Valspar currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the specialty chemicals industry with favorable Zacks Rank are American Pacific Corporation (APFC), American Vanguard (AVD) and Ferro Corp. (FOE). While both American Pacific and American Vanguard hold a Zacks Rank #1 (Strong Buy), Ferro retains a Zacks Rank #2 (Buy).

 
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