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RPM's Q3 Results to be at Higher End of Previous Guidance

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RPM International Inc. (RPM - Free Report) recently announced that it expects revenues, adjusted EBIT and earnings for third-quarter fiscal 2020 to be at the higher end of its previously announced guidance.

Chief Executive Frank Sullivan stated that even amid the COVID-19 outbreak, RPM’s supply chain and business operations remain strong. He also claimed that its March operating results are solid. Further, he revealed that the company intends to meet the changing needs of customers in this unprecedented period.

During fiscal second-quarter 2020 earnings release, the company anticipated revenue growth of 2.5-4%. It also expects adjusted EBIT growth within 25-30% and adjusted earnings in the high-teens to low-20-cent range.

Initiatives to Drive Growth

Fiscal third quarter is seasonally weak, thanks to slowing down of painting and construction activity due to cold and snowy weather. Nonetheless, RPM anticipates fiscal third-quarter results — set to be released on Apr 8 — to come in at the high end of its prior guidance, as the 2020 MAP to Growth initiative has started paying off. In the first six months of fiscal 2020, its earnings increased 27.6% and adjusted EBIT margin improved 210 basis points (bps) year over year.

It remains focused on its previously set target of 540-bps improvement in operating margin through 2020. The company is on track to reduce costs by closing plants, merging IT system, centralizing more of its back-office functions and rationalizing manufacturing footprint. Out of 31 plant consolidations, 19 have been completed in the fiscal second quarter.

For fiscal 2020, the company expects double-digit adjusted EBIT growth of 20-24%. Also, its earnings are expected in the range of $3.30-$3.42 per share, indicating a significant improvement from the fiscal 2019 level of $2.71.

In addition to restructuring, acquisitions have also been an important part of RPM’s growth strategy. Acquisitions added 1.5% to net sales in the first half of fiscal 2020 and 1.4% in fiscal 2019.

Our Take

Over the past year, RPM’s shares have declined 35.6% compared with the industry’s 30.3% fall. The company has been witnessing negative impact of foreign currency translation. Also, higher costs and expenses added to the woes. In the first six months of fiscal 2020, foreign currency headwinds negatively impacted sales growth by 1.3%. In the fiscal second quarter, SG&A expenses increased 50 bps year over year.

Despite the above-mentioned headwinds, we believe that the recent news will lift investors’ sentiments going forward.

Zacks Rank & Key Picks

Currently, RPM carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector include D.R. Horton, Inc. (DHI - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) and Meritage Homes Corporation (MTH - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

D.R. Horton, M.D.C. Holdings and Meritage Homes’ long-term earnings are expected to grow 10.7%, 8.5% and 6.8%, respectively.

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