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RPM Banks on Acquisition & Strategic Initiatives, Costs High

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Lower ASP and increased expenses impact Meritage Homes' (MTH) first-quarter 2019 results.

RPM International Inc. ’s RPM solid acquisition strategy and impressive performance of the industrial segment bode well. However, rising raw material, freight, labor and energy costs, foreign currency translation and adverse weather conditions might mar growth prospects.

Recently, the company reported better-than-expected fiscal third-quarter 2019 results. Its adjusted earnings of 14 cents per share and net sales of $1.14 billion surpassed analysts’ expectations by 27.3% and 0.2%, respectively. The company’s top line grew 3.4% year over year, given strong organic growth and recent acquisitions. However, its bottom line declined 33.3% from the year-ago period.

Coming to price performance, shares of RPM have outperformed its industry in the past year. The company’s shares have gained 22.3% compared with its industry’s rally of 15.3% in the said period.

Let delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Major Growth Drivers

Strategic Acquisitions: Acquisition plays an important role in RPM’s overall growth strategy. On Sep 10, 2018, the company acquired Nudura Corporation, a leading manufacturer and distributor of insulated concrete forms in North America, in order to function as a stand-alone operating unit of the Dryvit business within the Specialty segment. Dryvit is a catalyst manufacturer of exterior insulation and finish systems, and an innovator of lightweight and energy-efficient NewBrick.

Additionally, in March 2018, RPM acquired Miracle Sealants Company through its Rust-Oleum business group, in order to advance its hard surface care product portfolio. In the first nine months of fiscal 2019, acquisitions added 2.1% to the company’s total net sales.

Restructuring Initiatives: RPM has undertaken certain initiatives to reduce costs and expenses. The initiatives include plant-consolidation plans, realignment of some of its global brands and leadership restructuring. These efforts are likely to generate $25 million of cost synergies on an annualized basis to the company.

In the first nine months of fiscal 2019, gross margin increased 170 bps year over year. Also, in the fiscal third quarter, its adjusted EBIT margin improved 510 bps sequentially. 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.

Industrial Business, a Bright Spot: RPM’s Industrial segment is continuously experiencing solid sales numbers in North American waterproofing and industrial coatings businesses. The segment, which contributed nearly 51% to total net sales in the last reported quarter, acts as a key catalyst for the company.

In the first nine months of fiscal 2019, the segment’s sales increased 3.9% year over year, of which organic sales contributed 5% and acquisitions added 1.5%. Strong performance of North American commercial sealants and concrete admixture businesses, along with industrial coatings business added to the positives.

Causes of Concern

Increased Costs: RPM’s earnings declined significantly in the past three quarters despite undertaking several initiatives. The company witnessed raw material cost inflation for seven consecutive quarters. Also, freight, labor and energy costs, along with the adverse effects of transactional foreign exchange added to the woes. 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.

Currency Headwinds: RPM’s business is exposed to foreign exchange rate fluctuation risks due to its operations in Europe and other parts of the world. During the first nine months of fiscal 2019, unfavorable foreign currency impacted total net sales by 1.9%, primarily in the Consumer and Specialty segment.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Apergy Corporation APY, Quanta Services, Inc. PWR and AECOM ACM. While Apergy and Quanta Services sport a Zacks Rank #1 (Strong Buy), AECOM carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here .

Apergy, Quanta Services and AECOM’s earnings for the current year are expected to increase 2.8%, 25.3% and 2.6%, respectively.

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