RPM International's Inorganic Drive Strong, High Costs A Woe

Acquisitions play an important part of RPM International Inc’s (NYSE:RPM) growth strategy. In the first nine months of fiscal 2018, acquisitions added 3.5% to net sales. In fiscal 2017, the company made nine acquisitions with combined annual net sales of $221 million. This contributed 3.1% to net sales. The company is on track to pursue more acquisitions in the future.

Recent buyouts include Miracle Sealants Company and Whink Products, acquired through the Rust-Oleum business group. The takeover of Miracle Sealants adds another platform within Rust-Oleum’s hard surface care product portfolio. The Whink acquisition will accelerate the company’s expansion of indoor cleaning solutions.

Let’s us delve into other factors that work in favor the company’s prospects.

Cost-Saving Initiatives Strong: The company’s cost-saving initiatives bode well. RPM is well on track to reduce costs by closing plants, merging IT system, centralizing more of its back-office functions and rationalizing s manufacturing footprint. These efforts are expected to improve operating margin significantly.

Industrial Segment Major Revenue Driver: The industrial segment is the key driver of overall growth, contributing more than 50% to total sales. In the last reported quarter, sales improved 9.2% including organic sales growth of 2.2%. The segment has successfully implemented price increase. This, combined with increased sales in Tremco Roofing's liquid applied products and cost-cutting initiatives, boosted year-over-year operating income by 38.8% in the last quarter.

For the fiscal fourth quarter, the company expects solid performance from businesses serving the North American construction market, especially Tremco Roofing division. In the fiscal fourth quarter, sales in the Industrial segment are projected to grow in the mid to upper single-digits, courtesy of favorable foreign currency translation. Also, sales are expected to grow in the low-to-mid-single-digit range in fiscal 2018.

Attractive Shareholder Returns: RPM regularly returns value to investors through higher dividends. In fiscal 2017, the company increased quarterly cash dividend by 6.7% year over year. This marks RPM’s 44th consecutive annual hike in cash dividends. This positions the company in a category of less than half of 1% of all 19,000 publicly traded U.S. companies.

In spite of these positive factors, problems like increased raw material costs, uncertainties in overseas markets and inclement weather mar growth prospects.

Increased Raw Material Costs: Rising raw material costs, particularly in certain categories like epoxies and silicones, is a concern. A major portion of the raw materials are petroleum-based derivatives, minerals as well as metals. A hike in the price of these commodities affects raw material costs. Consumer segment operating income of $29.3 million was down year over year in the third quarter due to higher costs.

Exposed to Uncertainties in Overseas Markets: As foreign manufacturing operations accounted for approximately 34% of net sales for fiscal 2017, the company is susceptible to changes in political and economic conditions abroad.

Inclement Weather: Adverse weather conditions have affected sales of paint, coatings, roofing, construction products and related products. Extreme cold and rainy weather, especially during the general construction and exterior painting season, can affect sales of such products. Historically, the company faces weaker sales and net income in the fiscal third quarter (December 2017 through February 2018) compared with other quarters.

Meanwhile, RPM’s shares have lost 8.6% in the past year, against the industry’s 8.9% rise. Earnings estimates for the current fiscal fell 1.6%, while that of the next fiscal remained stable over the past 60 days, limiting upside potential for the stock.

Zacks Rank & Stocks to Consider

RPM carries a Zacks Rank #3 (Hold).

You can consider a few better-ranked stocks in the same sector.

M.D.C. Holdings, Inc (NYSE:MDC) , a Zack Rank #1 (Strong Buy) stock, is expected to witness 27.9% growth in earnings this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Beazer Homes USA, Inc. (NYSE:BZH) carries a Zacks Rank #2 (Buy). Its earnings are expected to grow 6.5% in fiscal 2018.

Meritage Corporation (NYSE:MTH) holds a Zack Rank #2. Its earnings are expected to grow 38.7% in 2018.

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