RPM International, Inc. (NYSE:RPM) is a manufacturer of specialty materials with applications in everything from industrial sealants, coatings, adhesives, roofing systems to edible coatings for the food and pharmaceutical industry. The company also offers consumer products such as paints and wood stains sold through home improvement retail channels. RPM benefits from a segment leadership position and overall solid fundamentals. Despite disruptions this year due to the COVID-19 pandemic, RPM just reported its latest quarterly results highlighted by resilient growth and strong earnings. We are bullish on shares and see further upside through the next year with continued operational and financial momentum.
RPM International reported its fiscal 2021 Q1 earnings on October 7th with non-GAAP EPS of $1.44, which beat expectations by $0.26. Similarly, GAAP earnings of $1.39 per share were also ahead of estimates and climbed an impressive 69.5% compared to the period last year.
(Source: Company IR)
The story here was a combination of top-line momentum coupled with improving margins driven by cost savings initiatives. Revenues reached $1.6 billion, up 9.1% y/y while the gross margin improved 170 basis points to 40.7%. SG&A declined by 1.2% y/y supporting a sharp improvement in the operating margin to 15.6% compared to 11.3% last year. Separately, RPM recorded lower restructuring expenses and less inventory-related charges rounding out a strong period financially. Comments by management in the earnings press release suggest the company is seeing efficiencies from an enterprise resource program, “ERP,” update conducted over the past year.
(Source: Company IR)
By market segment, the results were driven from strength in the Consumer Products Group with sales up a very impressive 34% y/y to $641 million. Management explains that the company benefited from trends in recent months including the ongoing housing boom and consumers looking for do-it-yourself home improvement projects. This dynamic is in line with broader industry trends during the pandemic supported by themes like stay-at-home. Similarly, the Construction Products Group reported a sales increase of 2.2% to $548 million, seeing strong demand from housing and segments like roofing materials. From the conference call:
The most significant driver of RPM’s first quarter growth was our consumer segment, which had already been experiencing unprecedented demand for small project paints, caulk, sealants, stains, cleaners, patch repair products as consumers completed more DIY home improvement projects.
On the other hand, revenues from the Performance Coatings Group lagged and declined by 12.6% year over year to $260 million. This segment continued to be impacted by disruptions from the pandemic that limited contractor access to large job sites. The company also mentioned that weakness from the energy sector customers pressured demand. Sales in the smaller Specialty Products Group at 158.0 million during the quarter were roughly flat with a decline of 1.3%.
Finally, the company ended the quarter with $252 million in cash and equivalents against total long-term debt of $2.3 billion. Considering EBITDA of $675 million over the trailing 12 months, the net-debt to EBITDA leverage ratio is approximately 3.0x. Keep in mind there is an expectation for climbing earnings going forward and the company intends to pay down debt with increasing free cash flow. Also, debt has been elevated given some recent acquisitions. Notably, debt has declined by $200 million from the end of last year. A current ratio of 2.2x highlights strong liquidity. In our view, the fundamentals here are strong.
Management Guidance and Consensus Expectations
For the current fiscal Q2, RPM management is targeting consolidated sales growth in low- to mid-single digits while the adjusted EBIT has room for 20% or more upside compared to the period last year. The company sees ongoing cost savings efforts through its “MAP to Growth” strategic long-term plan to contribute towards firming margins.
While not disclosing a specific full-year EPS target, the trends here imply strong earnings momentum. Management expects the consumer segment to remain strong while the construction and performance coatings group continue to face a slow recovery. Going forward, uncertainty related to the strength of the economy and progress in ending the pandemic were mentioned by the company in the earnings release as reasons for some caution.
“For the full year of fiscal 2021, our guidance is relatively unchanged from the direction we provided in our fiscal 2020 fourth-quarter earnings release. We anticipate that our Construction Products Group and Performance Coatings Group could experience sales declines for the next two quarters and then turn positive in the fourth quarter. Our Consumer Group should continue its strong sales momentum throughout the fiscal year. The Specialty Products Group is likely to face flat sales comparisons during the second quarter, which should turn positive in the second half of the year,” stated Sullivan. “These estimates assume that we do not experience a surge in Covid-19 that results in a second round of stay-at-home orders. Due to continued economic uncertainty related to the impacts of Covid-19 and the upcoming U.S. elections, we are not providing fiscal 2021 full-year earnings guidance.”
According to consensus expectations, RPM is on track to reach $5.8 billion in revenues this year, representing a 5.5% growth rate. The top-line trends are expected to moderate into the low single digits through fiscal 2023. More favorably is the outlook for EPS with the market expected earnings growth of 32% this year, and 8% in fiscal 2022. Overall, the financial outlook is a strong point for the company.
(Source: Seeking Alpha)
Analysis and Forward-Looking Commentary
RPM International as a major industrial sector and construction materials player remains exposed to cyclical trends. Ongoing uncertainty regarding the strength of the recovery adds a sense of caution to the near-term outlook. Still, we expect the company to benefit from its segment leadership position and overall solid fundamentals. The outlook is positive and we expect the growth momentum to continue.
In terms of valuation, considering the latest quarterly results, we calculate the stock is currently trading at approximately 38x P/E multiple over the trailing 12 months along with a price-to-sales multiple of 2.0x. Keep in mind that these ratios are elevated considering the weaker fiscal 2020 Q4 period disrupted by the COVID-19 pandemic, while the latest quarter suggests the underlying trends have improved. On a forward basis, RPM is trading at a more reasonable 23x current year consensus EPS which is below the five-year average for the stock.
The point here is that the stock appears attractive in the context of +37% earnings growth this year expected to continue with upside in the coming years. We also believe that RPM deserves a growth premium given its specialized products and segment leadership. Management’s strategy to pursue acquisitions supports an outlook for growing market share and maintaining pricing power. Accelerating cash flows and declining leverage also justify a premium for the stock.
We are bullish on shares with a buy rating and have a one-year price target of $100, representing approximately 10% further upside from the current level. Recognizing the ongoing uncertainties related to macro conditions, we expect operating momentum for RPM to continue for the upcoming quarters. The company is well-positioned to navigate various types of market environments.
Risks here beyond a complete deterioration of the economic outlook, a significant slowdown in the housing market, or pullback of consumer spending related to home improvement projects would likely lead to revisions lower in earnings estimates. Monitoring points for the next quarter include the trend in margins, while we would like to see a pick-up in momentum from the lagging Performance Coatings Group and Specialty Products.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.