Improved pricing and product mix, along with the positive benefits of the restructuring activity, are helping Valspar Corporation (VAL) to realize sales gains. However, a slumping housing market slowed demand for paint. Moreover, higher raw material costs are eroding margins for the company. We expect margins to remain under pressure due to lower volumes in major product segments and higher raw material costs.
However, its acquisition strategy and rationalizing activities undertaken to restore margins make us believe that the stock deserves to trade at a higher P/E multiple, and thus we rate the stock a Hold. Valspar had undertaken various rationalization initiatives to combat raw material cost pressure and improve its efficiency. Under its rationalizing activities, VAL closed 13 manufacturing facilities in 2006.
This will enable the company to re-allocate capital resources to the best performing facilities and improve efficiency levels. Moreover, annual savings of $0.10 $0.12 per share are likely to be generated following the expected completion of rationalization activity. Currently, Valspar Corporation is trading at 12x our 2008 EPS estimate of $1.66. Owing to high raw material costs and a slowing housing market, margins may fall. We have set a target price of $21, which is 12.7x our 2008 EPS estimate.
Read the full analyst report on VAL.
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