Investopedia: RPM Still Rolling Ahead

The construction industry is still in lousy shape, whether an investor looks at the residential or commercial segments. That makes RPM International's (NYSE:RPM) performance all the more interesting; although volume is not strong, it is positive and the company seems to be holding its own despite no real tailwinds to help it along.

Beginning the Fiscal Year on a Good Note  
RPM managed to get off to a good start for the fiscal year. Revenue rose more than 10% and the company surpassed the high end of the analyst estimate range. Top-line performance was balanced in terms of growth; the consumer business saw sales up 9% while industrial revenue rose almost 11%.

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Investopedia: RPM Still has Some Horsepower

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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Industrial-Strength Performance At RPM

Specialty chemicals is one of those catch-all categories that seems convenient but is actually pretty worthless in practice. Cytec (NYSE:CYT), WR Grace (NYSE:GRA), Solutia (NYSE:SOA) and RPM International (NYSE:RPM) all carry this label, but the similarities are few and far between apart from a general exposure to rising input costs. Nevertheless, looking a little deeper sometimes pays off, for while RPM needs a better housing market to really do well, the stock could be an attractive dividend-plus-capital-gains story for patient investors. 

The Quarter That Was
RPM's fiscal first quarter results require a little bit of explanation. As reported, sales were down about 2%, but this is a case where "as reported" is not very accurate. The company elected to deconsolidate its Specialty Products Holding Company subsidiary and allow it to go into bankruptcy to help resolve asbestos liabilities. Not only does that take away some units like Day-Glo and Dryvit, but it also makes historical comparisons misleading. 


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