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RPM International (RPM) to Report Q3 Earnings: What's Up?

Zacks Equity Research

RPM International Inc. RPM is scheduled to report third-quarter fiscal 2019 results on Apr 4, before the opening bell.

In the last reported quarter, the company’s earnings and revenues missed the Zacks Consensus Estimate by 21.2% and 2.2%, respectively. In fact, RPM International missed the consensus mark in three of the trailing four quarters, with average negative earnings surprise of 22.7%.

Not only its earnings lagged the consensus mark, but also the bottom line declined 8.8% year over year. However, net sales increased 3.6%, mainly attributable to strong organic growth of 3% and 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.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is currently pegged at 11 cents, remaining unchanged over the past 60 days. This reflects a decrease of 47.6% from the year-ago earnings of 21 cents per share. Revenues, however, are expected to be $1.14 billion, up 3.2% year over year.

Let’s see how things are shaping up for this announcement.

Key Factors

A challenging raw material environment has been pressurizing the company’s margins and eventually the bottom line over the last few quarters. Gross and operating margins contracted 210 basis points (bps) and 410 bps, respectively, during first-half fiscal 2019, owing to the above-mentioned headwind. Particularly, the cost of silicones, asphalt, epoxy and acrylic resins is increasing significantly.

Resultantly, the company’s adjusted earnings declined 10.5% year over year during the said period. In addition, freight, labor and energy costs, along with the adverse effects of foreign currency translation added to the woes.

RPM International anticipates these trends to persist in the fiscal third quarter as well. 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, 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 21 cents.

That said, the company has been aggressively pursuing price increases to offset the increasing material prices and protect gross profit margins. Price increases introduced late first-quarter 2019 helped the company mitigate margin erosion in the consumer segment in the fiscal second quarter. The company anticipates a slow improvement between its raw material costs and pricing and product mix for the rest of fiscal 2019.

Meanwhile, RPM International’s cost-saving initiatives bode well for bottom-line performance. Notably, the company’s multi-year restructuring plan, the 2020 Margin Acceleration Plan (“2020 MAP to Growth”), helped it maintain a balance between its segments’ performance and drive growth.

During fiscal second-quarter 2019, the company reduced 149 positions and announced the closure of five manufacturing facilities. It aims to realign some of its global brands and make changes to its leadership structure. These efforts are expected to significantly boost operating margin. It remains focused on its previously set target of 540-bps improvement in operating margin. All activities under the company’s 2020 MAP to Growth plan are anticipated to be completed by the end of the calendar year 2020.

Segment-wise, the Zacks Consensus Estimate for Industrial segment revenues (accounting for more than 52.7% of its total revenues) is pegged at $578 million, indicating an uptick from $569 million recorded in the year-ago period but a decline from $718 million in the last reported quarter.

The consensus estimate for Specialty segment’s revenues is pegged at $176 million, reflecting a year-over-year improvement of 3.5% but a sequential decline of 17%.

Consumer segment revenues are estimated to be $379 million, reflecting an increase from $363 million in the year-ago period but a decline from $433 million in the last reported quarter.

RPM International Inc. Price and EPS Surprise

RPM International Inc. Price and EPS Surprise | RPM International Inc. Quote

What Our Model Indicates

Our proven model does not suggest that RPM International is likely to beat estimates in the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here, as you will see below.

Earnings ESP: The Earnings ESP for the company is 0.00% as the Most Accurate Estimate and the Zacks Consensus Estimate are both pegged at 11 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: RPM International currently has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks to Consider

Here are some companies in the construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarterly reports:

KBR, Inc. KBR has an Earnings ESP of +5.59% and carries a Zacks Rank #2.

Martin Marietta Materials, Inc. MLM has an Earnings ESP of +53.94% and holds a Zacks Rank #3.

Vulcan Materials Company VMC has an Earnings ESP of +0.80% and carries a Zacks Rank #3.

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