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RPM to Benefit From Strategic Acquisitions Amid Rising Costs

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RPM International Inc. (RPM - Free Report) is poised to benefit from strategic acquisitions, cost-saving initiatives and robust performance of its industrial segment. However, increased raw material costs and inclement weather remain causes of concern.

Shares of RPM, a Zacks Rank #3 (Hold) company, have outperformed its industry in the past six months. Its shares have gained 40.2% compared with its industry’s rally of 22.2% in the said period.




Catalysts Driving Growth

Acquisition plays an important part in RPM’s growth strategy. Acquisitions added 3% to net sales in fiscal 2018.

In March 2018, RPM acquired Miracle Sealants Company through its Rust-Oleum business group, thereby adding another platform within Rust-Oleum’s hard surface care product portfolio. Meanwhile, last December, the company acquired Whink Products, a specialty cleaners manufacturer and marketer, through its Rust-Oleum business group. The Whink acquisition will accelerate the company’s expansion into other indoor cleaning solutions.

Notably, in fiscal 2017, the company made nine acquisitions, contributing 3.1% to net sales. Notable among them are the foam division of a corporation in Missouri that expanded its product coverage and provided a cost-effective manufacturing and technology platform; a manufacturer of commercial waterproofing products based in Australia; and a product line that manufactures professional equipment as well as chemicals for cleaning and restoring carpet in Arizona. The company is on track to pursue more acquisitions in the future.

RPM’s cost-saving initiatives bode well for its bottom-line performance. The company has been undertaking initiatives to reduce expenses as well as carry out plant-consolidation plans, primarily at Rust-Oleum. These efforts will generate $25 million of savings on an annualized basis and significantly improve operating margin in the near future.

Additionally, it’s industrial segment — contributing more than 50% to total sales — acts as a key catalyst behind the company’s overall growth. The segment has been reporting impressive numbers over the past few quarters. In the fourth quarter, the segment’s sales increased 10.8% following a gain of 9.2% in third-quarter fiscal 2018. Also, for fiscal 2019, the segment’s sales are expected to grow in low single-digits, especially in its Tremco Roofing division.

Hurdles to Cross

Rising raw material costs, particularly in certain categories like epoxies and silicones, continue to play a spoil sport. Its Consumer segment’s operating profit was down 74.4% year over year in the fourth quarter, owing to higher raw material costs. RPM expects the challenging raw material environment to persist, thereby creating pressure on the company’s gross margin.

Additionally, extreme cold and rainy weather, especially during the general construction and exterior painting season, could have an adverse effect on sales of such products. Adverse weather conditions have also affected sales in North America, delaying the coating and construction projects.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Continental Building Products, Inc. (CBPX - Free Report) , PGT Innovations, Inc. (PGTI - Free Report) and NCI Building Systems, Inc. (NCS - Free Report) . While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Building’s earnings for 2018 are expected to increase 52.6%.

PGT Innovations’ 2018 earnings are expected to grow 80.3%.

NCI is expected to record 81.3% earnings growth in fiscal 2018.

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