RPM International (RPM) Up 4.4% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for RPM International (RPM). Shares have added about 4.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is RPM International due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

RPM Misses Q2 Earnings and Revenue Estimates

RPM International Inc. reported second-quarter fiscal 2019 results, wherein earnings and revenues missed the Zacks Consensus Estimate. The company reported adjusted earnings per share of 52 cents in the quarter, missing the consensus mark of 66 cents by 21.2%. Also, the reported figure declined 8.8% from the year-ago figure of 57 cents.

Net sales of $1.36 billion in the quarter lagged the consensus mark of $1.39 billion by 2.2%. Nevertheless, the reported figure increased 3.6% year over year, mainly attributable to strong organic growth of 3% along with acquisition growth of 2.6%.

However, strong sales growth continues to be offset by rising raw material costs. In addition, freight, labor and energy costs, along with the adverse effect of transactional foreign exchange added to the woes.

Operating Highlights

Gross margin of 39.5% decreased 240 basis points (bps) year over year in the fiscal second quarter, owing to higher raw material and freight costs.

Adjusted earnings before interest and taxes (EBIT) in the reported quarter came in at $126 million. Adjusted EBIT margin of 9.2% also declined 80 bps year over year.

Segment Details

The company has three reportable segments — Industrial, Specialty and Consumer.

Industrial segment (contributing 52.7% to net sales): Sales in the segment increased 2.1% to $718 million, given strong performance across the businesses providing corrosion control coatings, as well as concrete admixture and repair products. However, second wettest autumn in the United States partially offset the positives, primarily in the commercial roofing business.

Organic sales growth contributed 3.3%, while acquisitions added 1.5%. Foreign currency translation negatively impacted sales by 2.7%.

Consumer segment (31.7%): Sales improved 4.1% to $432.6 million during the quarter, owing to 2.8% organic sales growth. Acquisitions contributed 2.9%, whereas foreign currency translation negatively impacted sales by 1.6%. Organic growth was primarily driven by higher pricing, along with new product introductions in sealants and adhesives business. However, extremely wet weather negatively affected the segment’s performance during the reported quarter.

Specialty segment (15.6%): Sales increased 7.6% to $212 million on the back of 2.3% organic sales growth and 6.1% acquisition growth during the said quarter. However, foreign currency translation impacted sales by 0.8%. The segment gained from wood coatings, powdered coatings and fluorescent colorants businesses, along with the benefits from the acquisition of Nudura in September 2018.

Balance Sheet

As of Nov 30, 2018, the company had cash and cash equivalents of $226.9 million compared with $244.4 million at fiscal 2018-end.  

Long-term debt (excluding current maturities) at the end of fiscal second quarter was $1.92 billion compared with $2.18 billion at fiscal 2018-end.

In the first half of fiscal 2019, the company had cash from operations of $148.3 million compared with $115.2 million in the corresponding period of fiscal 2018.

Third Quarter of Fiscal 2019 View

The company expects revenues to grow in a low to mid-single-digit range during the fiscal third quarter.

Moreover, it anticipates lower earnings for the fiscal third quarter due to raw material cost challenges and three non-operating items. To be more precise, the company projects tax rate of approximately 26%, a negative impact from unrealized gains and losses on equity securities of $5-$6 million, and the absence of long-term incentive compensation during the said quarter. Resultantly, for the fiscal third quarter, its earnings are expected in the range of 10-12 cents per share, lower than the year-ago level of 30 cents.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -59.88% due to these changes.

VGM Scores

At this time, RPM International has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It’s no surprise RPM International has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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