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Will Currency Woes Offset RPM's 2020 MAP to Growth Plan?

Zacks Equity Research

RPM International Inc.’s RPM shares has been rallying high over the past three months as the company’s restructuring initiatives have started paying off. Also, strategic buyouts and expansion plans add to the positives. Notably, its Construction Products Group (“CPG”) is a major growth driver.

Notably, shares of this Zacks Rank #3 (Hold) company has gained 7.7% compared with the industry’s 3.7% growth in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, unfavorable foreign currency translation is hurting this specialty chemicals manufacturer and seller. Additionally, higher labor costs add to the woes. Earnings estimates for the current year have been trending upward over the past 60 days.

Let’s delve deeper into the factors influencing its growth and performance.

Major Growth Drivers

RPM has been undertaking certain restructuring initiatives to reduce costs and expenses. In order to maintain a balance between its segments’ performance and drive growth, the company undertook a multi-year restructuring plan, namely the 2020 Margin Acceleration Plan (“2020 MAP to Growth”). Impressively, in the first six months of fiscal 2020, its earnings increased 27.6% and adjusted EBIT margin improved 210 basis points (bps) year over year.

Given positive results led by the above-mentioned initiatives, the company expects to generate double-digit adjusted EBIT growth of 20-24% in fiscal 2020. Also, it expects earnings in the range of $3.30-$3.42 per share, indicating a significant improvement from the fiscal 2019 level of $2.71. Moreover, RPM realized 2020 MAP to Growth savings of $31 million so far.

In addition to cost-saving plans, RPM continues to focus on strategic buyouts and expansion initiatives that are driving growth. Recently, the company’s Mantrose-Haeuser business acquired Elgin, IL-based manufacturer of dry stabilizer and emulsifier blends — Profile Food Ingredients, LLC. This creates significant opportunities to leverage the combined sales forces of the entities, expand sales of specialty ingredients to the food industry and broaden RPM’s reach in international markets.

Notably, the company’s CPG segment, comprising more than 1/3rd of total fiscal second-quarter sales, acts as a key catalyst. The segment has been reporting impressive numbers over the last few quarters. In the first six months of fiscal 2020, the segment’s sales increased 5.2% from the comparable year-ago period, given strong organic growth and solid buyout strategy. Strong performance in roofing and Brazilian businesses added to the positives.


RPM — which shares space with Quanta Services, Inc. PWR, AECOM ACM and Altair Engineering Inc. ALTR in the Zacks Construction sector — has been witnessing higher labor costs, along with the adverse effects of transactional foreign exchange over the last few quarters. In fiscal second-quarter 2020, SG&A from its Consumer segment increased approximately $10.1 million due to higher commissions, distribution and interplant freight expenses as a result of increase in volume. Although the company expects moderate material costs going forward, labor costs and currency headwinds are likely to persist. Significant restructuring charges arising from the initiatives undertaken by the company raise concerns.

RPM’s business is mostly based on outdoor work and is impacted by inclement weather. Its business is highly affected during the fiscal third quarter (December through February), wherein it generates weaker sales and net income than other quarters.

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