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RPM's Strategic Acquisitions Bode Well, Material Costs High

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RPM International Inc. (RPM - Free Report) is poised to benefit from strategic acquisitions and cost-saving initiatives. Additionally, its Industrial segment constitutes a major growth driver. However, raw material cost inflation and adverse weather conditions might mar the growth prospects.

Let delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Growth Drivers

RPM, one of the leading specialty coatings, sealants, building materials and related service providers, reported better-than-expected net sales of $1.46 billion in the first quarter of fiscal 2019. The reported figure grew 8.5% year over year, given strong organic growth of 7.8%. Also, acquisitions added 1.5% to total net sales.

Acquisition plays a significant role in RPM’s growth strategy. On Sep 10, 2018, the company acquired Nudura Corporation, a leading manufacturer and distributor of insulated concrete forms (“ICF”) in North America.

Nudura will function as a stand-alone operating unit of the company’s Dryvit business within its Specialty segment. Dryvit is the one of the leading manufacturers of exterior insulation and finish systems in North America, and the innovator of NewBrick, a lightweight, as well as energy-efficient brick product.

Moreover, RPM’s cost-saving initiatives bode well for its bottom-line performance. The company has been undertaking various initiatives to reduce expenses. The initiatives include plant-consolidation plans primarily at Rust-Oleum, merging IT system, centralizing more of its back-office functions and rationalizing its manufacturing footprint. Notably, in the fiscal first quarter, the company reduced more than 150 positions, mainly in the Industrial and Specialty segments. It is well on track to close additional four manufacturing facilities.

These efforts will generate $25 million of savings on an annualized basis and significantly improve its operating margin in the near future.

Notably, RPM’s Industrial segment is experiencing strong North American waterproofing business, as well as industrial coatings business serving the oil and gas sector. The segment, which contributed 53.6% to total sales in the last reported quarter, acts as a key catalyst behind the company’s overall growth. Given the positives, the segment’s sales increased 7.2% year over year during the quarter. Consequently, the company expects fiscal 2019 sales to grow in the mid-single-digit range for the segment.

Shares of RPM have outperformed its industry in the past year. The company’s shares have gained 15.1% against its industry’s decline of 1.2% in the said period. Earnings estimates for the current year have also moved north over the past 30 days.




Concerns

Although the company posted higher revenues in the last reported quarter, it witnessed raw material cost inflation for five consecutive quarters. Particularly, cost of silicones, asphalt, epoxy and acrylic resins are increasing significantly. Gross margin in the fiscal first quarter decreased 190 basis points (bps) year over year. Going forward, the company expects the challenging raw material environment to persist, thereby creating a pressure on gross margin.

Additionally, restructuring charges, higher legal and advertising costs in the Consumer segment, along with the adverse effect of transactional foreign exchange continue to raise concerns. During the said quarter, selling, general and administrative expenses, as a percentage of net sales, expanded 220 bps from the prior-year quarter. Also, its pretax income of $91.9 million declined 40.8% year over year.

Stocks to Consider

Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes currently sports a Zacks Rank #1 (Strong Buy), Altair Engineering and EMCOR both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes, Altair Engineering and EMCOR’s 2018 earnings are expected to increase 111%, 23.1% and 20%, respectively.

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