Investors have looked for signs of an economic slowdown, and a common theme this earnings season will be whether companies are able to maintain sales growth at the pace shareholders anticipated. For RPM International (RPM 0.84%), the coatings and sealants it sells have implications for both the consumer and industrial economies, and so many investors are watching the company as a gauge of conditions in those areas. Moreover, RPM has made huge efforts to restructure in order to make the most of its opportunities.
Coming into Wednesday's fiscal first-quarter financial report, RPM shareholders wanted to see modest sales growth along with encouraging trends on the earnings front. RPM's earnings were stronger than expected, and the company made significant progress with its strategic plan. Yet many investors seemed to focus on shortfalls in sales in some key areas, drawing conclusions about a possible slowdown both for RPM and the broader economy.
RPM starts fiscal 2020 on a mixed note
RPM International's fiscal first-quarter results left some shareholders wanting more. Revenue climbed just 1% to $1.47 billion, which was slower than the nearly 3% growth rate that most of those following the stock had wanted to see. However, net income soared by more than 50% to $106.5 million. After accounting for some one-time items, adjusted earnings of $0.95 per share topped the consensus forecast among investors by $0.03 per share.
Image source: RPM.
RPM changed up its segments as part of its restructuring, and this was the first time that investors have seen results based on the new categories. In the construction products group, net sales climbed 3.6%, due largely to the acquisitions of Nudura and Schul over the course of the past year. Price increases were able to help the segment overcome labor shortages and poor weather conditions that affected construction activity levels. Pretax earnings were up 23% year over year for the segment on an adjusted basis. Similarly, the performance coatings group saw slow organic growth rates of just 0.4%, but acquisitions added a couple percentage points to sales growth, and adjusted pre-tax profit was up 31% from year-ago levels as RPM chose to get out of more challenging product niches to concentrate on high-margin opportunities.
Elsewhere, RPM's consumer group saw organic sales growth of just 0.1%, but adjusted pre-tax income climbed 19% on market share gains and more efficient production methods. Only the specialty products group came under significant pressure, with a 4.3% drop in organic sales and just a 9% rise in pre-tax income resulting from weak demand among the segment's customer base.
Can RPM keep growing faster?
Overall, CEO Frank Sullivan said that RPM remains on track. "We continued to experience the benefits of the plant rationalization, manufacturing improvements, and center-led procurement initiatives of our 2020 MAP to Growth operating improvement plan during the quarter," Sullivan said. Yet the CEO admitted that a wet June and a strong U.S. dollar weighed on overall results, despite efforts to boost margin levels across the company.
RPM also tried to keep expectations realistic. For the second quarter, the coating and sealant specialist believes that sales will climb 2% to 3%, with pre-tax profit seeing growth of 20% to 24%. However, Sullivan reined in projections for the fiscal third and fourth quarters, pointing to typical seasonal sluggishness as construction in North America comes largely to a halt during the winter months. RPM therefore thinks full-year revenue growth will come in toward the lower end of its previously projected 2.5% to 4% range, but it still sees adjusted earnings of $3.30 to $3.42 per share.
RPM shareholders weren't entirely comfortable with that outlook, and the stock was down between 2% and 3% in pre-market trading following the announcement. Going forward, a lot will depend on whether RPM sees broader economic weakness weigh down its growth. If the economy performs better than many now expect, then the company could bounce back quickly from its recent challenges.
