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Recovery Progress Missing: RPM Earnings Review

Recs

3

October 06, 2009 – Comments (3) | RELATED TICKERS: RPM

One of my first CAPS picks and core income holdings, RPM International (RPM), reported earnings on Mon the 5th.  RPM is a holding company for a number of brands of coatings, sealants, roofing systems and flooring coatings.  Their end customers are industrial users and retail consumers.  You may very well have some of their Rustoleum paint or DAP caulk in your home.

In addition to my interest as a shareholder, RPM’s results should be a good economic indicator.  As you might expect, the economic picture painted is mixed and inconclusive.

The earnings number was very good.  Analysts were expecting 44 cents a share; RPM delivered 57 cents without any one-time adjustments.  As with many companies, cost cutting played a big role in the earnings beat.  Revenues were 7% below the year-ago quarter.  Foreign exchange accounted for nearly 4% of the revenue decline.

The revenue mix did give a little insight into the economic picture.  RPM’s industrial products are widely used in construction and the retail products are used in home repair and maintenance.  Consumer segment sales were up 12.5% compared to the year ago quarter while industrial sales declined 14%.

The increase in consumer sales would be consistent with stabilizing home sales and a higher than normal percentage of foreclosed homes (which are likely to need more repair) in that sales mix.

Regarding industrial sales, CEO Frank Sullivan had the following statement in the earnings release, “As anticipated, our industrial segment continues to face a depressed commercial construction environment and reduced capital spending in many markets.”

During the conference call, Mr. Sullivan’s revenue guidance for the rest of RPM’s FY 10 was for continued improvements in the consumer business.  On the industrial side, he expects continued weakness for the next quarter, then flat for the next two quarters.

Mr. Sullivan did add some insight into which areas of the industrial business are holding up best, in the conference call Q&A, “In general, our maintenance and repair industrial products, product lines for corrosion control, for flooring that go into energy or maintenance or infrastructure are holding up much better than those product lines that are involved in construction, in particular commercial and new construction.”

The report and conference call were generally good news for shareholders. 
 - Compared to a year ago, RPM has reduced their debt level. 
 - Although there was no mention of the amount, the company statements indicated intent to maintain the 35 year string of annual dividend hikes, although increases will probably be modest. 
 - RPM is forecasting a 5 – 25% year over year increase in earnings.
 - The company is well positioned to continue acquiring brands or other companies.

RPM’s industrial sales results do not seem consistent with the reports of recovery we’re getting from government officials and some media talking heads.  If the economy was improving, I would expect to see increased demand for the types of products RPM makes – paints, sealants, roofing systems, etc.  They aren’t seeing that demand pick-up and aren’t expecting it anytime soon.

On the other hand, the retail product revenue increases indicate some increases in home improvement and maintenance, which would be consistent with improvements in home sale numbers.

I was hoping RPM would have broken the sales out by region, but no such luck.

As an investment, RPM seems fairly valued.  The dividend yield is over 4% and the next payout announcement should increase it slightly.  Countering that is a business that’s tied to construction and a fair amount of debt.  Today RPM announced a $300 million bond issue with the vast majority of the proceeds going to refinance notes coming due this month and to pay off short-term debt.  In summary, RPM is a good way to get positioned for an eventual improvement in the economy and get paid while you wait – however long that may be.

All conference call quotes are from the transcript at SeekingAlpha.  Thanks to SA for providing the transcripts at no charge.

Fool On!

Russ

Disclosure:  At time of posting, I’m long RPM.

What company reports have you seen or will you be watching to provide evidence of recovery or not?

3 Comments – Post Your Own

#1) On October 16, 2009 at 3:43 AM, ikkyu2 (99.22) wrote:

Hi Russ,

Do you know offhand how much of RPM's revenue (%) comes from rest-of-world (i.e. non-US)?

I am awaiting the OLN conference call, 10/30.  They're so transparent and easily analyzed.  I'm expecting 12 cents from the chlor-alkali business and 5-7 cents from Winchester, and that would be a lousy number, it would indicate to me that core industrial demand has not even really stabilized.

PPG reports about a week before and their Cl-Al division is almost identical in size to OLN's, so I'll be eyeing that too.  PPG makes a lot of diversified industrial inputs. 

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#2) On October 17, 2009 at 8:39 AM, davetheDINK (< 20) wrote:

Russ: "RPM’s industrial sales results do not seem consistent with the reports of recovery we’re getting from government officials and some media talking heads.  If the economy was improving, I would expect to see increased demand for the types of products RPM makes – paints, sealants, roofing systems, etc.  They aren’t seeing that demand pick-up and aren’t expecting it anytime soon."

My response: Capital expenditures such as those RPM's Industrial segment supplies, lag the economy.

Let's say a dairy held back on flooring replacement in 2009 and wants to use RPM's Stonhard product.  They are planning this fall to allocate capital for the next year.  If the Industrial segment shows growth, assuming a pent-up demand for those products, growth will be up a little 2010 and much more 2011, as larger projects break loose.

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#3) On October 22, 2009 at 9:07 PM, rd80 (97.59) wrote:

I didn't see a US vs. RoW break down in the quarterly.  The 2009 Annual Report shows 37% of sales from outside the US.  They have a detailed breakdown on page 5 (pg 8 of the pdf) in the report.

Thanks for the replies.

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