Value In Valspar (VAL)
Alex Klabin, Managing Partner and Co-Chief Investment Officer at Senator Investment Group, LP spoke at the Harbor Investment Conference yesterday and he said, that like David Darst, he is focusing on defensive businesses for the next two year, not cyclical companies such as Caterpillar (NYSE: CAT) or Deere (NYSE: DE).
Klabin, who has $3 billion dollars under management, said he believes that defensive businesses are trading at a discount of about 20% to where they should be trading, given historical valuations. He specifically mentioned looking at Merck (NYSE: MRK), after the drug company missed earnings this week. Klabin said the company is probably full of bloat and there is a lot of fat that could probably be cut there.
Klabin said that expectations for defensive companies are very low, with only about 4% earnings growth, barely outpacing infaltion.
The specific name he discusses at the conference is The Valspar Corporation (NYSE: VAL), which manufactures and distributes coatings and paints across the world. Klabin described the company as a combination of Sherwin Williams (NYSE: SHW) and a coating application company.
The company is a global leader in coating applications, with a 40% market share. Valspar makes the coatings on the inside of plastic bottles used for Coca-Cola (NYSE: CO) and other manufacturers. Without it, the acidic acid in the Coke would eat away at the bottle.
In the paint segment of the business, Klabin said he sees the quiet ability to raise prices for paint, and no one would noticed. Painting your house isn't something you do once a week or every couple weeks Klabin said. It's done once in a while, and no questions are asked about the cost of a bucket of paint.
Klabin also believes that Valspar could be a takeout candidate, as he believes the industry needs to consolidate. Along with Valspar, RPM International Inc. (NYSE: RPM) is another potential takeout candidate, and companies like PPG (NYSE: PPG), Sherwin Williams and Akzo Nobel NV (AKZOY.PK) could be potential acquirers. Klabin said he sees at least 25-30% upside from today's prices, and given the recent defensive LBO's we've seen, such as Del Monte (NYSE: DM), there could be as much as 40% upside to shares, should a private equity firm go after the company.
Klabin said that Akzo Nobel, PPG, and Sherwin Williams could pay $60 per share for the company and it would still be accretive. Past deals in the sector have gone for 10-12 times EBITDA, and it's trading sharply lower than that.
Valspar manufactures and distributes coatings, paints, and related products primarily in the United States, China, and Europe. The company's Coatings segment offers decorative and protective coatings for metal, wood, and plastic, primarily for sale to original equipment manufacturer customers. Its products include primers, top coats, varnishes, inks, sprays, stains, fillers, and other coatings used in a range of manufacturing industries, including building products, appliances, furniture, transportation, agricultural and construction equipment, metal packaging, and metal fabrication.
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