What Makes Me Bullish on This Chemical Stock
Jan 6th 2012 11:58AM
Updated Jan 6th 2012 3:48PM
RPM International (NYS: RPM) continues to battle with high input costs, as was evident from the slow net-profit growth in its second quarter.
Nevertheless, there are things for which RPM deserves a watchful eye. Read on to know what I am talking about.
Good to see revenue growing
Higher volumes and prices drove RPM's revenues to $916.1 million, up a good 10.9% from last year. Organic sales in the company's industrial segment (which accounts for nearly 70% of RPM's total sales) and its consumer segment grew 5.9% and 12.5%, respectively. These figures are impressive as they do not include contributions from the various acquisitions the company has been aggressively making in the last few months.
Unfortunately, high input costs ate into RPM's revenues, denting its bottom-line growth. Its profits managed to crawl up by just 2.3% from the year-ago quarter to $49.9 million. RPM's price hikes were sadly not enough to beat the pace of cost escalation.
The imposing challenge
High input costs have been a pain for RPM for some time now. The entire coating and paints industry has, in fact, been hit hard by the persistent passing-the-buck strategy of raw material producers, forcing companies like RPM to raise the prices of their products.
Paint retailer Sherwin-Williams' (NYS: SHW) third-quarter bottom line grew just 3% in spite of a 14.4% revenue jump as input costs continued to shoot up. The company didn't just sit back and watch. It raised prices to save its top-line growth. Things weren't very different for Valspar (NYS: VAL) , whose fourth-quarter revenue shot up 19.4%, largely driven by prices. Valspar also resorted to price hikes, and the company isn't ruling out further hikes anytime soon.
But there's a common concern that's worrying all the three companies -- the time lag between the rise in input costs and the implementation of price hikes.
Sadly, producers of key raw materials such as titanium dioxide aren't showing interest in getting off the price-hike bus so soon. Take DuPont (NYS: DD) , for instance. It kept making its TiO2 dearer throughout last year, thereby boosting its third-quarter top line by a solid 32%. And the last TiO2 price hike announced by DuPont came into effect Jan. 1. Not surprisingly, this is going to show on the books of companies like RPM in the forthcoming quarters.
What's RPM's tactic to tackle the challenge? Further price hikes; what else can it do? Now, this should blend well with the expected accretion of sales from its newly acquired companies and help RPM combat the high-cost pressure.
An eye on growth
Just like the first quarter, RPM's second quarter was also dotted with acquisitions. It acquired a fire protection firm as well as an equipment and solutions provider during the period. A few days back, RPM bought an insulating and finish systems provider, targeting markets in Germany and France.
RPM also raised its stake in Indian chemical company Kemrock to 23% in September, which is an excellent opportunity to increase presence in the fast-growing Indian market. Needless to say, RPM continues to impress with its growth moves.
The Foolish bottom line
What I like about RPM is its growing top line and acquisitive use of cash. But you might find the company's handsome dividend yield of 3.4% even more attractive.
RPM might be expecting a lukewarm third quarter owing to seasonality, but in the longer run, there are enough reasons to maintain an optimistic view of the stock. To make sure you stay updated on RPM's news and analysis, click here to add it to your watchlist, our free and personalized stock-tracking service for you.
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At the time this article was published Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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