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Buyout Strategies Drive RPM, Currency Headwind Persists

Zacks Equity Research

RPM International Inc. RPM is poised to benefit from strategic acquisitions and expansion initiative, along with cost-saving moves. Moreover, robust performance in the Construction Products Group segment added to the upside.

Although RPM’s shares have underperformed its industry so far this year, earnings estimates for fiscal 2020 have inched up 0.3% in the past 60 days. This depicts analysts’ optimism over bottom-line growth prospects.



However, increased raw material costs and foreign exchange rate fluctuation are persistent headwinds.

Let’s delve into the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Catalysts Driving Growth

RPM continues to focus on strategic buyouts and expansion initiatives that are likely to drive growth in the long haul. The company made five acquisitions during fiscal 2019 and seven in fiscal 2018. On Jun 12, 2019, the company’s Tremco Commercial Sealants & Waterproofing unit acquired two Hudson, NH-based businesses — Schul International Co., LLC and Willseal LLC. Notably, acquisitions added 2.3% to net sales in the first quarter of fiscal 2020 and 1.4% in fiscal 2019.

RPM has also been undertaking certain restructuring initiatives to reduce costs and expenses by closing plants, merging IT system, centralizing more of its back-office functions and rationalizing manufacturing footprint. The 2020 Margin Acceleration Plan (2020 MAP to Growth) initiative is aimed to stabilize segmental performance and to drive growth. Courtesy of this plan, RPM’s fiscal first-quarter earnings increased 25% and gross margins expanded 140 basis points (bps) year over year.

Moreover, the company is focused on its previously set target of 540-bps improvement in the operating margin. All activities under the 2020 MAP to Growth plan are anticipated to be completed by the end of calendar year 2020.

Meanwhile, the Construction Products Group segment (contributed 36.4% to fiscal first-quarter sales) is a key catalyst for overall growth. The segment has been reporting impressive numbers since the last few quarters. In fiscal first quarter, the segment’s sales increased 3.6% from the year-ago quarter’s levels on strong organic growth and solid buyout strategy. Strong performance from its basement waterproofing solutions business as well as recovery in its Brazilian operation, which generated significant sales growth, led to the upside. Also, savings from restructuring program, which includes management delayering, plant rationalization and improved manufacturing disciplines, helped RPM to improve segment EBIT by 23.1% in fiscal first quarter.

Concerns

RPM’s business is exposed to foreign exchange rate fluctuation risks due to operations in Europe and other parts of the world. Economic conditions were weak in South America and in Europe, which is the company’s second-largest market. Foreign exchange reduced RPM’s overall net sales by 2.6% in fiscal 2019 and 1.3% in the first quarter of fiscal 2020.

In addition, increase in freight, labor and energy costs are concerns.

Key Picks

Some better-ranked stocks in the Zacks Construction sector include Quanta Services, Inc PWR, Martin Marietta Materials, Inc MLM and Toll Brothers, Inc TOL. Quanta Services and Martin Marietta Materials each sport a Zacks Rank #1 (Strong Buy). Toll Brothers carries a Zacks Rank #2 (Buy).

Quanta Service’s current-year earnings is expected to rise 15%.

Martin Marietta Materials has three-five year expected earnings per share growth rate of 11.2%.

Toll Brothers earnings surpassed estimates in all of the trailing four quarters, the average being 17.5%.

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