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Will RPM's Acquisition & Expansion Plans Combat Cost Woes?

Zacks Equity Research

RPM International Inc. RPM is poised to gain from strategic acquisitions and expansion initiatives, along with cost-saving moves. Notably, its Industrial segment constitutes a major growth driver.

Notably, shares of this Zacks Rank #3 (Hold) company have outperformed its industry in the past year. The stock has gained 10.2% compared with the industry’s rally of 8.5% in the said period. Earnings estimates for the current year have been trending upward over the past 60 days, reflecting analysts’ optimism surrounding the stock.



However, raw material cost inflation, higher restructuring charges and other expenses might mar growth prospects.

Let delve deeper into the factors influencing the company’s performance.

Catalysts Driving Growth

RPM continues to focus on strategic buyouts and expansion initiatives that are likely to drive growth in the long haul. On Sep 10, 2018, the company acquired a leading manufacturer and distributor of insulated concrete forms in North America, Nudura Corporation, to operate as an independent unit of the Dryvit business. Remarkably, Dryvit is a catalyst manufacturer of exterior insulation and finish systems, and an innovator of lightweight and energy-efficient NewBrick.

Notably, in the first nine months of fiscal 2019, acquisitions added 2.1% to the company’s total net sales.

RPM has been undertaking certain restructuring initiatives to reduce costs and expenses. Impressively, in the above-mentioned time period, gross margin increased 170 basis points (bps) year over year. Particularly, in the third quarter of fiscal 2019, its adjusted EBIT margin improved 510 bps sequentially.

Given positive results led by the above-mentioned initiatives, the company expects to generate double-digit EBIT growth and earnings within $1.12-$1.16 per share in the fiscal fourth quarter. Considering the mid-point of the guided range, the anticipated earnings are significantly higher than the year-ago level of 63 cents.

These efforts are likely to generate $25 million of cost synergies on an annualized basis.

It’s industrial segment (comprising nearly 51% of total fiscal third-quarter sales) acts as a key catalyst for overall growth. The segment has been reporting impressive numbers over the last few quarters. In the first nine months of fiscal 2019, the segment’s sales increased 3.9% from the comparable year-ago period, given strong organic growth and solid buyout strategy.

Strong performance of North American commercial sealants and concrete admixture businesses, along with industrial coatings business added to the positives.

Concerns

Earnings declined significantly in the last three quarters despite several cost-saving initiatives undertaken by RPM. The company witnessed higher raw material costs for seven consecutive quarters. Also, freight, labor and energy costs, along with the adverse effects of transactional foreign exchange added to the woes.

In the fiscal third quarter, its bottom line declined a significant 33.3% from the year-ago level due to the above-mentioned headwinds. The company expects these challenges to persist due to higher petrochemical costs, rising global demand, and changes in international trade duties and policies, thereby pressuring margins.

Significant restructuring charges arising from the initiatives undertaken by the company, and higher legal and advertising costs in the Consumer segment raise concerns. Notably, its gross margin and adjusted EBIT margin declined 60 bps and 100 bps, respectively, in the fiscal third quarter, owing to the above-mentioned headwinds.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Quanta Services, Inc. PWR, AECOM ACM and Altair Engineering Inc. ALTR, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Quanta Services, AECOM and Altair’s earnings for the current year are expected to increase 29.5 %, 3.7% and 53.7%, respectively.

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