MAP to Growth Aids RPM International (RPM) Amid Cost Woes
RPM International RPM has been riding high on its strategically balanced business model and the 2020 MAP to Growth initiative. The company is benefiting from strong demand for commercial sealants and roofing in North America on pent-up demand due to the pandemic-related delays, timely acquisitions, and favorable product mix and moderation in some raw material categories.
Recently, RPM International reported third-quarter fiscal 2021 results, wherein both earnings and revenues beat the Zacks Consensus Estimate by 11.8% and 5.4%, respectively. Moreover, the top and bottom lines grew 8.1% and 65.2%, respectively, on a year-over-year basis. The company’s robust results reflect strong sales growth in three of the operating segments and solid execution of the MAP to Growth plan.
However, foreign exchange rate fluctuation, weather-related woes, higher labor and material costs may negatively impact the business in the future.
Major Growth Drivers
Inorganic Strategy Driving Growth: RPM International’s growth strategy is largely dependent on acquisitions. During the first nine months of fiscal 2021, the company invested $217.9 million mainly in acquisition-related activity in comparison with $164.1 million in the prior-year period. Notably, the company has completed two acquisitions in March 2021 and it is concentrating more on acquisition to increase its top line.
In September 2020, RPM International’s Rust-Oleum business acquired a leading manufacturer of sandpaper and other abrasives, Ali Industries, LLC. On Dec 18, 2019, RPM International announced that its Mantrose-Haeuser business unit has acquired Elgin, IL-based manufacturer of dry stabilizer and emulsifier blends for the food industry — Profile Food Ingredients, LLC. Again, on Jun 12, 2019, its Tremco Commercial Sealants & Waterproofing unit acquired two Hudson, NH-based businesses, namely Schul International Co., LLC and Willseal LLC.
The company made three buyouts in fiscal 2020, five in fiscal 2019 and seven in fiscal 2018. Acquisitions added 1.1% to net sales in fiscal 2020 and 1.4% in fiscal 2019. For the first nine months of fiscal 2021, acquisitions contributed 1.6% to sales.
MAP to Growth Initiative: The company is reducing its costs by closing plants, merging IT systems and centralizing more of its back-office functions. In 2018, it took a multi-year restructuring plan — 2020 Margin Acceleration Plan (“2020 MAP to Growth”) — to maintain a balance between its segments’ performance as well as drive growth. The initiative has started paying off, which is evident from earnings and margin growth in fiscal 2020 and the first nine months of fiscal 2021.
The company’s net income increased 222.6% year over year to $38.2 million in the third quarter of fiscal 2021, owing to the MAP to Growth operating improvement. In the fiscal second quarter, it announced the closure of two additional plants, which brings the total to 25 to date, out of the previously announced 31 plant closures targeted in the MAP to Growth operating improvement program. Although the completion of the project is not anticipated before fiscal 2022, the company disclosed that it expects to achieve annualized pretax savings of $290 million by May 31, 2021.
Superior ROE: RPM International’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 35.9%. This compares favorably with ROE of 24.3% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and indicates RPM International’s ability to generate profit with minimum capital usage.
Concerns
Shares of the company have underperformed its industry’s rally for the past year. Also, earnings estimates for fiscal 2021 have decreased 1.4% over the past seven days, depicting analysts’ concerns. Foreign currency-related risks, inflationary pressures and supply woes are concerning.
RPM International is exposed to foreign exchange rate fluctuation risks due to its operations in Europe and other parts of the world. In fiscal 2019, the company’s overall net sales were affected due to the negative impacts of foreign currency translation. Although the effect of foreign currency was not very adverse during the first nine months of fiscal 2021, Construction Products Group sales were reduced by 0.4% in the period.
Also, unfavorable weather conditions have affected sales of paint, coatings, roofing, construction products and related products in the first nine months of fiscal 2021. Historically, the company’s fiscal third quarter (December through February) faces weaker sales and net income compared with other quarters. In February 2021, a winter storm disrupted the supply chain significantly.
Lately, RPM International has been witnessing higher costs and expenses related to restructuring, acquisitions, labor, distribution and freight. The company is observing rising raw material costs that increased more than double year over year.
Key Picks
RPM International currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Construction sector are KB Home KBH, Toll Brothers Inc. TOL and PulteGroup, Inc. PHM. KB Home and Toll Brothers currently sport a Zacks Rank #1(Strong Buy), while PulteGroup carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
KB Homes and Toll Brothers’ earnings for fiscal 2021 are expected to rise 74.8% and 53.2%, respectively. Notably, PulteGroup’s 2021 earnings are expected to rise 18.7%.
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