If a company can do alright in the midst of a terrible end-user market, it stands to reason that the company should do pretty well when the eventual recovery comes. That could well be the thesis for investors looking at RPM International (NYSE:RPM) these days. While the residential real estate market has been a disaster recently, and the commercial market has not exactly been muscular, the company has continued to produce free cash flow. With a bevy of well-known brands, this should be a company in line to benefit from an eventual real estate and construction rebound.
The Quarter That Was
Although things might get better someday, that day has not come yet. Sales were up 5% on a pro forma basis, with all of the growth coming from the company's industrial business. Industrial sales climbed about 8%, with more than half of that growth from organic improvement. By comparison, the consumer segment declined about 0.6%, with organic "growth" down more than 1%. For the company's fiscal second quarter, industrial was more than 70% of the company's sale base.
In point of fact, 5% growth actually compares pretty well to the company's historical average revenue growth rate, so investors really do not see the impact of a bad market environment until they get to the profits. Gross profit rose about 1.5% this quarter (and gross margin fell about 150 basis points), while consolidated EBIT increased a bit less than 3%.
The problem here is not that management decided to give themselves big raises or install gold-plated toilets. Rather, the issue is input costs. Companies like Dow (NYSE:DOW), DuPont (NYSE:DD), and BASF have not exactly been dropping prices lately, and RPM really does not have the leverage to push price increases through into the end-user market (particularly in the consumer segment). There's not much for the company to do, then, but eat some of those costs. (For more, see Analzying Operating Margins.)
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2 comments:
That RPM got through the financial crisis / home & commercial building shutdown with only a sliver of goodwill impairment ($14.9M in FY2009) was a surprise to me.
This is a company that until recently had negative tangible equity. That concern kept me out when the stock was cheap, as I waited for the charge (and potential over reaction to it) that never came.
Oh well.
Zz
True ... though the way they've handled the asbestos liability may have been a back-door way of handling some impairment in a more "market-friendly" manner.
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