The construction industry is still in lousy shape, whether an investor looks at the residential or commercial segments. That makes RPM International's (NYSE:RPM) performance all the more interesting; although volume is not strong, it is positive and the company seems to be holding its own despite no real tailwinds to help it along.

Beginning the Fiscal Year on a Good Note
RPM managed to get off to a good start for the fiscal year. Revenue rose more than 10% and the company surpassed the high end of the analyst estimate range. Top-line performance was balanced in terms of growth; the consumer business saw sales up 9% while industrial revenue rose almost 11%.

The consumer business saw decent volume growth (up 4%), but stay tuned to earnings reports from companies like Sherwin-Williams (NYSE:SHW), Valspar (NYSE:VAL) and Lowe's (NYSE:LOW) to see how much of this is a recovery in the market and how much is due to market share growth. On the industrial side, volume growth was less impressive (less than 2%) and the company got almost half of its growth here from currency.

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RPM did pretty well on margins as well. Gross margin fell about 50 basis points as persistent input cost inflation took its toll, but RPM seems to be doing better than many of its peers. Moreover, the company recouped some of this through its operating expenses and operating income rose almost 12%, with the industrial segment showing better growth. With basic chemical companies like Dow (NYSE:DOW) and specialty component companies like Kraton (NYSE:KRA) still passing on price increases, this margin pressure does not look to stop any time soon, so RPM will be challenged in finding that right mix of pricing that maintains margins without hurting volume too badly.

Maintenance Vs. Growth
When it comes to the sort of coatings that RPM sells, this is not an especially strong market. Rivals like Akzo Nobel (Nasdaq:AKZOY) and PPG (NYSE:PPG) are seeing decent results in highly specialized coating segments like optics, but the lines more comparable to RPM are not so strong. As mentioned earlier, that is not entirely surprising - new activity in residential construction is all but dead, and not a whole lot stronger in the commercial segment either.

Still, there are ongoing needs that have to be met. Roofs and floors need regular maintenance and conditions in the economy are not so dire that building owners can't handle those routine costs. Likewise, residential owners still have to maintain their dwellings and RPM maintains a solid position on the shelves of stores like Lowe's, Home Depot (NYSE:HD) and True Value.


At the same time, investors can take some encouragement from the fact that RPM has been able to push price hikes (largely in response to input costs) and still keep positive trends going in volume. With RPM's two largest markets, North Ameica and Europe, both weak, that is a strong testament to the value of the company's brands - value that probably represents a floor in the stock insofar as a strategic buyer would step in at some point and acquire the company if it got too cheap.

The Bottom Line
RPM is not likely to expand into the high-performance coatings that have helped PPG or make up a lot of the business at companies like Ferro (NYSE:FOE) or Lubrizol (NYSE:LZ) (soon part of Berkshire Hathaway (NYSE:BRK.A)). On a more positive note, though, the company has weathered the worst housing and construction market in living memory in pretty good shape and should be in a solid position to benefit from what will likely be a long, slow recovery.

RPM is a good company with an OK stock. At current prices, it looks like RPM has a better-than-average chance of beating the S&P 500 over the next years. At the same time, though, fears of a double-dip recession and persistent cost inflation will likely keep institutional enthusiasm for these shares somewhat muted. That 4.5% dividend yield is appealing, though, and it may convince value-oriented investors that it pays to buy and be patient with these shares. (For additional reading, take a look at Build Your Portfolio With Infrastructure Investments.)

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