Free Annual Reports
Industrial-Strength Performance At RPM
Specialty chemicals is one of those catch-all categories that seems convenient but is actually pretty worthless in practice. Cytec (NYSE:CYT), WR Grace (NYSE:GRA), Solutia (NYSE:SOA) and RPM International (NYSE:RPM) all carry this label, but the similarities are few and far between apart from a general exposure to rising input costs. Nevertheless, looking a little deeper sometimes pays off, for while RPM needs a better housing market to really do well, the stock could be an attractive dividend-plus-capital-gains story for patient investors.
IN PICTURES: 5 "New" Rules For Safe Investing
The Quarter That Was
RPM's fiscal first quarter results require a little bit of explanation. As reported, sales were down about 2%, but this is a case where "as reported" is not very accurate. The company elected to deconsolidate its Specialty Products Holding Company subsidiary and allow it to go into bankruptcy to help resolve asbestos liabilities. Not only does that take away some units like Day-Glo and Dryvit, but it also makes historical comparisons misleading.
On an adjusted basis, then, RPM reported that sales climbed 6% in the quarter. Growth was fueled almost entirely by the industrial segment, where 7% volume growth led to overall growth of 9%.
Gross margin declined in the quarter (those aforementioned raw material costs), but adjusted operating income climbed 8%. This improved performance was largely fueled by the industrial segment, where EBIT margins managed to surpass pre-crisis levels.
The Road Ahead
Industrial markets seem to be doing alright now - though the recent ISM report does suggest a slowing pace of improvement. The consumer side, especially residential construction, is still struggling. Nevertheless, the company is looking to implement some price hikes. Apart from that, there does appear to be strength in areas like high-performance coatings, roofing and waterproofing. That could be good news for others like Kraton Performance (NYSE:KRA), Ferro (NYSE:FOE) and Sherwin-Williams (NYSE:SHW) as well, though these stocks have already had big runs.
Turning back to RPM, the near-term outlook is still pretty mixed. Performance seems strong enough to continue to fuel a generous dividend, and the value of brands like Tremco and Rust-Oleum do provide some economic moat for the company. Eventually the consumer sector will recover and that should allow the company to regain double-digit returns on capital, even if robust sales growth is probably not especially likely.
The Bottom Line
RPM went on a tear in September, and that took away a large chunk of the easy money to be made on the name in the short-term. This is still a very appealing option for income investors who want companies that reliably pay (and increase) their dividends. With some patience, there is a good chance of earning returns that meet or beat the market with this stock, but long-term investors may want to let this one cool off a bit first. (For related reading, take a look at 10 Tips For The Successful Long-Term Investor.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 5 "New" Rules For Safe Investing
The Quarter That Was
RPM's fiscal first quarter results require a little bit of explanation. As reported, sales were down about 2%, but this is a case where "as reported" is not very accurate. The company elected to deconsolidate its Specialty Products Holding Company subsidiary and allow it to go into bankruptcy to help resolve asbestos liabilities. Not only does that take away some units like Day-Glo and Dryvit, but it also makes historical comparisons misleading.
On an adjusted basis, then, RPM reported that sales climbed 6% in the quarter. Growth was fueled almost entirely by the industrial segment, where 7% volume growth led to overall growth of 9%.
The Road Ahead
Industrial markets seem to be doing alright now - though the recent ISM report does suggest a slowing pace of improvement. The consumer side, especially residential construction, is still struggling. Nevertheless, the company is looking to implement some price hikes. Apart from that, there does appear to be strength in areas like high-performance coatings, roofing and waterproofing. That could be good news for others like Kraton Performance (NYSE:KRA), Ferro (NYSE:FOE) and Sherwin-Williams (NYSE:SHW) as well, though these stocks have already had big runs.
Turning back to RPM, the near-term outlook is still pretty mixed. Performance seems strong enough to continue to fuel a generous dividend, and the value of brands like Tremco and Rust-Oleum do provide some economic moat for the company. Eventually the consumer sector will recover and that should allow the company to regain double-digit returns on capital, even if robust sales growth is probably not especially likely.
The Bottom Line
RPM went on a tear in September, and that took away a large chunk of the easy money to be made on the name in the short-term. This is still a very appealing option for income investors who want companies that reliably pay (and increase) their dividends. With some patience, there is a good chance of earning returns that meet or beat the market with this stock, but long-term investors may want to let this one cool off a bit first. (For related reading, take a look at 10 Tips For The Successful Long-Term Investor.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
Free Annual Reports
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=0b4619bc3986342d2a5633a23a456b9d
