Housing: Valspar's A Good Gauge

Recently, the depressed housing market has shown some positive signs of strength. On Monday, new home sales figures came out: 369K homes were sold versus 350K expected, the fastest annualized pace of sales in more than two years. Also, on Tuesday, the April S&P Case-Shiller Home Price Index increased 0.7% M/M, an increase which comes after seven consecutive months of declines.

Survey Says? Positive Outlook
Accompanying these encouraging signs was a recent survey by Zillow of more than 100 leading economists. As noted by the survey, "For the first time, the individual economists surveyed were largely in agreement on the trajectory of home prices nationally, signaling that a true bottom may be imminent." Investor's Business Daily also recently ranked the homebuilders group as No. one in its ranking of 197 industry groups. Also, mortgage rates have hit an all-time low this week according to a weekly mortgage market survey from Freddie Mac, another sign of a potential rebound by the housing sector.

Of course, these nascent signs of growth in the housing industry don't translate into 10% home-jump prices, as some have stated possible. But they do lead to increased optimism about the state of our housing market, which in turn paves the road for increased traction for a recovery.

Home-Related Boost
Moreover, the positive news provides a boost for housing-related companies such as Home Depot (HD), Lowe's (LOW). Analysts surveyed by Thomson Reuters see Home Depot's annual profit rising 18% to $2.92 a share for this year. Lowe's Home Improvement recently reported a 29% YOY increase in earnings, which caps off a commendable earnings growth rate of 26% for its last 3 quarters.But there is one true star of the building sector: The Valspar Corporation (VAL). The Valspar Corporation is the sixth largest coatings and paints manufacturer and distributor in the world. It has seen tremendous growth recently, as evidenced by 46% average earnings growth for the past 3 quarters.

Moreover, this growth has largely been sustained throughout recent years: Valspar has a three-Year EPS Growth Rate of 24% and has reported three consecutive years of annual earnings growth. Valspar also has raised its shareholder dividend for 34 consecutive years. Although Valspar recently lowered estimates for this year's earnings growth, it is in a strong position to benefit from an improving domestic housing market; about half of Valspar's revenue is generated in the U.S. Investors agree, as evidenced by the 36.9% YTD gain in its stock price.

Valspar's strong earnings is due to several reasons. For one, it has been on top of innovation in the coatings and paints industries, which are hardly known for technological advances. Recently, Valspar introduced a new paint color application, known as ConnectLIVE, that will will enable customers to pick the right color for their home. This app, available for free download on the iPad, utilizes video technology to create a virtual appointment between a Valspar color consultant and customers; the color consultant recommends a customized color scheme for each person’s space and style. Valspar's innovative mindset and its ability to leverage new technology for its own benefit will continue to positively impact the company in its future.

Valspar is also significantly benefiting from its international presence. Although it was recently negatively impacted by a soft housing market in Australia, Valspar has had huge success in China. Much of its growth is coming from a wider array of products aimed at the Chinese affordable housing market, which is being supported by the Chinese government. Valspar's products have been positively received in China, which remains a relatively untapped market for major coatings and paints companies.

Expansion
Despite these significant advantages, Valspar is not content to rest on its laurels. Instead, it has continued to aggressively expand while also undergoing restructuring to improve the company. In 2010, it announced the acquisition of Australian paint manufacturer Wattyl Limited, which has played an integral part in establishing Valspar's presence in the Asia Pacific region. Valspar has also recently initiated a restructuring plan in which it is dumping high volume but unprofitable product lines in order to create a slimmer, more profitable company. This has allowed Valspar to post a gross margin of 34.6% for the second quarter of 2012, up 230 basis points from 2011. Also, Valspar's paint segment EBIT margin increased to 12.5% in the second quarter of 2012, up 200 basis points YOY. With this combination of restructuring and aggressive expansion, Valspar is poised to benefit in the long term.

Overall, Valspar is an excellent company with sound financials that has several significant catalysts going in its favor. If the U.S. housing market continues to improve, Valspar will be an attractive stock that investors should definitely consider adding to their portfolios.