Valspar Is Ready to Rebound: Under the Radar

MINNEAPOLIS (TheStreet) -- Demand for Valspar(VAL Quote) paint stagnated in recent years as the weak credit market and struggling economy hurt home sales. The company increased revenue 1.2% annually, on average, for the past three years, while profit dropped 7.9%.

Despite the unimpressive numbers, Minneapolis-based Valspar is showing signs of life again. Fiscal third-quarter revenue dropped 17% to $795 million, but net income rose 40% to $62 million, or 61 cents a share.

Valspar's quarterly gross margin advanced from 31% to 39% and its operating margin rose from 9% to 14%, helped by a substantial decline in the cost of sales as a percentage of revenue. Lower interest expenses also helped its bottom line.

Valspar's cash balance has grown 26% to $127 million since the year-earlier quarter and its debt load has fallen by 19% to $879 million. Its quick ratio of 1.1 demonstrates adequate liquidity. Valspar's debt-to-equity ratio of 0.6 is below the industry average, implying restrained leverage.

Management's efforts to streamline have been recognized by investors. Valspar shares have rallied 40% this year, more than major U.S. indices. But over the past month, the stock has lost 8% of its market value. If the sell-off persists, Valspar will be a stock to watch.

With a trailing price-to-earnings ratio of 19, the stock is on par with the market, but trading at a moderate discount to chemical peers. However, Valspar is 58% cheaper than its peer group based on book value and 40% cheaper based on projected earnings.