Shares of coatings and sealants company RPM International (RPM -0.57%) rose 11% in July, according to data from S&P Global Market Intelligence. There's little doubt over the catalyst for the move, with the stock rising significantly after a well-received set of fourth-quarter earnings released on July 22.
In a sense, the outperformance versus the broader market is somewhat reflective of the market's mood toward industrials in the past month, because it's more about cost-cutting than any improvement in end markets.
A slew of companies have reported weakness in industrial end markets during the past quarter, and RPM's exposure to industrial and construction activity, which was hurt by weather-delayed projects, meant it had what Treasurer and VP of global tax Matt Ratajczak described as "severe challenges" in the quarter.
RPM's industrial sales, making up 52% of total sales, were flat in the quarter and up only 2% on an organic basis. No matter, as consumer sales, which made up 34% of total sales, rose 6.7% on a reported basis and 7% on an organic basis.
However, the real story is that RPM managed to leverage its overall sales increase of just 2.8% into a 22.4% increase in adjusted earnings before interest and tax. The reason?
Discussing matters on the earnings call, CEO Frank Sullivan put it down to "significant earnings leverage for the quarter, which was bolstered by our 2020 MAP [margin acceleration plan] to Growth operating improvement plan, the benefits of which are beginning to be realized." He added, "Also contributing to the bottom line were recently implemented price increases and stabilizing raw material cost inflation."
The results confirm that the company is on track with its target of generating $290 million in run-rate benefits by December 2020. In fact, the $102 million achieved in the so-called first wave, from September 2018 to May 2019, is ahead of the original target of $83 million, but CFO Rusty Gordon took a cautious approach to matters in saying that it was too early to determine if it was due to a pull-forward from the next wave or something "cumulative to the entire 2020 MAP to Growth program."
For reference, the program involves closing plants, warehouses, and non-plant locations; reducing procurement costs; and cutting staff.
The second and third waves are expected to be completed by December 2020, and consequently, management's guidance for adjusted EPS of $3.30-$3.42 for fiscal 2020 implies earnings growth of around 28% at the midpoint. Similarly, analysts have EPS growing at 24% to $4.18 in 2021.
RPM International needs to keep executing on the 2020 Map to Growth plan while continuing to generate low- to mid-single-digit revenue growth. If that happens, the self-help initiatives should be enough to propel the stock higher in the coming years. That might prove to be a compelling investment proposition compared with many companies that lack the ability to convert moderate revenue growth into something stronger in the earnings line.