2010 Economic Slowdown Seen As Boon For Valspar (VAL) As Consumers Trending To DIY Projects Instead Of Hiring Contractors
July 26, 2010 - The Wall Street Transcript has just published Building Materials, Residential Construction and Housing Report offering a timely review of the Building Materials sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Ivan Marcuse is a Vice President in equity research at Northcoast Research, where he focuses on the building material and specialty chemical sectors. Previously, he was with KeyBanc Capital Markets. Mr. Marcuse has an MBA with a concentration in finance from the Weatherhead School of Management at Case Western Reserve University.
TWST: What do you cover within the building/construction area?
Mr. Marcuse: Right now our primary focus is on roofing, and paints and coatings. In the commercial roofing space, we cover Carlisle Co. (CSL), and we also cover a roofing distributor, Beacon Roofing Supply (BECN). The paint companies we cover are Valspar (VAL), RPM (RPM), PPG (PPG) and Masco (MAS), which includes several different building products, but also they own Behr Paint.
TWST: Have the companies in your coverage universe been hit by the economic problems that have impacted the sector?
Mr. Marcuse: The sector as a whole traded lower with the market, including paint and roofing stocks. In 2008 and early 2009, Sherwin-Williams (SHW) actually held up a little bit stronger than people thought. Most of the coating companies came back pretty sharply due to the variable cost structure versus a pure manufacturing company. For coating companies, when raw materials went down and pricing held steady, you saw margin expansion, which helped earnings in 2009 come in higher than consensus expectations. For a distributor like Beacon, even though new construction has been a challenge, the replacement aspect of the industry was a real benefit to the company and helped its earnings.
TWST: Is the sector seasonally impacted by things like storms?
Mr. Marcuse: The roofing definitely is. No one really wants to see the destruction of a hurricane come through, but when it does happen and it's a major storm, it benefits any roofing company significantly, such as an Owens Corning (OC) or a Beacon Roofing, or even a Carlisle, which is 100% commercial construction.
TWST: Is the sector as a whole changing? Are we seeing things like consolidation or other trends?
Mr. Marcuse: In the coatings industry, you are seeing consolidation. Just recently, Valspar bought the second largest Australian paint company. Sherwin-Williams has made a couple of acquisitions recently. RPM has made some small acquisitions. On the roofing manufacturer front, on the commercial side, it's dominated by a few large players, which are Carlisle, Firestone (BRDCY), GAF and Johns Mansville. On the residential side, it's gone through consolidation over the past several years, and there are now four major players there who dominate 90% of the market. For roofing distributors, just recently ABC Roofing Supply, the largest U.S. roofing distributor, which is a privately owned company, bought Bradco, which is another privately owned company and the third largest U.S. roofing distributor. Beacon has made a few small acquisitions recently. Consolidation will continue, led by companies who have cash and are well managed. Those that have strong balance sheets, like Carlisle or Beacon, and pretty much most of the coatings companies who have cash to spend, will likely continue to be consolidators as these companies make acquisitions to drive growth.
TWST: Who do you like in the space and why?
Mr. Marcuse: Right now we like Valspar a lot. The reason for that would be their DIY exposure. When you see an economic slowdown, you tend to see a consumers paint themselves versus hiring a contractor. They are going to a Lowe's (LOW) for supplies, and a Valspar is a direct beneficiary of this traffic. We like Masco for the same reason, as they own Behr, and its overall DIY exposure. Choosing between the two, we probably prefer Valspar, since Masco is leveraged overall more towards housing construction and big-ticket discretionary purchases. But we like companies right now with DIY exposure and small maintenance and repair exposure. RPM is a company that we would be buying right now for those reasons also.
TWST: What about stocks that are well positioned if the economy improves? Are you watching any interesting stories?
Mr. Marcuse: Carlisle has gone through a lot of restructuring over the last two years and could show significant earnings growth once volume improves. Masco has also taken out a lot of costs and has improved its fixed-cost structure, which will benefit earnings once the company's markets begin to show a sustained recovery.
TWST: Should investors be looking at this sector right now? What issues should they be aware of?
Mr. Marcuse: I think you need to pick and choose. I think if you're a holder of a Beacon or Carlisle, you will want to remain a holder. Valspar again is a stock that we like and has performed very well year-to-date. RPM, if you're looking for a high-yield, safe play to go into, and who benefits from the DIY or the small-ticket repair and replacement market, that's a place to go to. So I think if you pick and choose, there are opportunities out there.
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