Chemical Investors: J.P. Morgan Prefers PPG To Valspar Now

• The Valspar Corp VAL shares have gained 13 percent in the last three months, even after hitting a low of $70.82 on September 28.
• JP Morgan’s Jeffrey J. Zekauskas downgraded the rating on the company from Overweight to Neutral, while raising its price target from $83 to $85.
• Following the recent spike in Valspar’s shares, the F2016 FCF yield currently represents fair value, Zekauskas mentioned.

Valspar’s current F2016 free cash flow yield is estimated at 5.1 percent, following the surge in the company’s share price. Analyst Jeffrey Zekauskas considers a 5 percent free cash flow yield as representing fair value, since this is not high “relative to our coverage universe average.”

Valspar’s stock is currently trading at 11.8x EV/EBITDA versus shares of PPG Industries, Inc. PPG, which are trading at 11.5x for 2016. Valspar’s shares have climbed 14 percent in the last two months, versus a 5 percent rise in the S&P Index. YTD, Valspar’s shares are down 1 percent, versus a 1 percent rise in the S&P Index. The company’s shares are flattish with the S&P Index at a rise of around 1 percent over a 12-month period.

Valspar would have a challenging earnings performance in 1Q:F16, since it would be up against a robust volume period in the year-ago quarter, Zekauskas noted. The EPS estimate for F2016 has been reduced from $5.10 to $4.95.

The analyst expects Valspar’s revenues to be flat to down in F2016. He expects forex headwinds foreign to offset the benefits accruing from acquisition-related sales growth. The company’s EPS growth is likely to be driven by control over SG&A expenses, stable pricing and lower raw material costs.

“We think the coatings company now offering the most favorable risk/reward balance for investment in the year ahead is PPG. We estimate PPG’s 2016 free cash flow yield at just below 6%. We expect PPG to benefit from a favorable raw material dynamic and good domestic volume growth versus weak 1H:15 domestic volume comparisons,” the JP Morgan report stated.