Valspar's third quarter falls shy of expectations

Valspar Corp. grew during its fiscal third quarter, but weak demand abroad caused the paint and coatings company to miss analysts' expectations Tuesday and to lower its forecast for the full year.

Valspar's stock plunged $6.11 a share to $64.66 in early trading. It closed Tuesday at $66.35 a share, down $4.42.

"Sales and earnings finished slightly below our expectations for the quarter due to continued macroeconomic headwinds in key industrial market segments and certain international regions," CEO Gary Hendrickson told analysts during a conference call Tuesday.

Three key issues hurt results.

Demand for Valspar's protective industrial coatings fell in several countries as some customers used existing inventory instead of ordering new. The industrial coatings sting was also felt in China. Lastly, Australia's housing market failed to improve as expected, which affected Valspar's struggling paint store chain there.

The combination of events stifled international sales, but officials insisted they were temporary problems.

On the plus side, Valspar's paint business rose 3 percent during the quarter, while coatings sales rose just 1 percent. While international woes hurt coating sales, demand was strong for U.S. packaging, coil and wood coatings, officials said.

Citing global economic conditions that are expected to last through the end of the fiscal year, executives reduced Valspar's full-year guidance Tuesday. Earnings are now expected to be $3.45 to $3.55 a share. That's down from the prior guidance of $3.60 to $3.80 a share.

Still, Hendrickson said he remains confident that targeted growth and select restructuring initiatives have set the company in motion for stronger results in 2014.

Valspar is restructuring its supply chain due to its agreement to manufacture private label paints for Ace Hardware stores. Valspar is also building upon its 2012 partnership with the B&Q hardware chain in Britain. And it recently purchased the Inver Group in Italy, which makes industrial liquid and powder coatings in Europe. Going forward, Inver, which has about $200 million in annual sales, is expected to add 10 cents a share to earnings, officials said.

"I remain extremely confident that Valspar is well positioned for the long term," Hendrickson said.

But several analysts questioned Hendrickson and CFO Jim Muehlbauer about how long it will take Valspar to return to its usual performance. They noted that the company raised its 2013 guidance as recently as the end of the first quarter. Now it's lowering the forecast.

Hendrickson said Valspar is still on track and characterized the quarter's woes as cyclical, not structural. He also noted that "our U.S. business has been very strong this year. The housing market is recovering. Construction spending is up and we have secured significant new business wins."

He added that volume sales rose 10 percent during the quarter and around 15 percent so far this year. That, paired with international fixes and expansions, means "we're set up for a good year in 2014."

Dee DePass • 612-673-7725