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Raw Materials Keep RPM Idling

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 12:29PM

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High raw material costs are keeping a lid on growth at RPM.

This isn't the best time to be in the business of making sealants, coatings, and other sorts of specialty chemicals. With oil prices as high as they are and building-block chemicals both expensive and sometimes in short supply, many downstream companies are seeing margins and profits pressured by these raw material costs. That would appear to be the case at RPMInternational (NYSE:RPM), a Motley Fool Income Investor recommendation, considering the fact that respectable sales growth is not translating into similar profit growth.

For the company's fiscal first quarter, revenue rose 13%, as the consumer business grew 7% and the industrial business grew 18%. Overall, nearly 11% of the growth was organic -- a rather solid performance in my view. Margins, though, are still under pressure because the company has not been able to effectively pass on all of its increased costs. As a result, net income (adjusted to exclude charges for asbestos litigation) was only up about 9% for the quarter.

Hurricanes Katrina and Rita aren't going to make things any easier right away. Not only did the storms disrupt operations, but they have already led to price spikes and intermittent shortages of some chemicals. Over the longer term, though, RPM could stand to benefit from the reconstruction effort. With products in the roofing, flooring, and corrosion control markets, I would imagine that there will be higher demand for RPM's industrial products, though I'm not sure what sort of pricing power it'll have, relative to higher raw material costs.

It doesn't appear that there's really anything new on the asbestos front. The company made $10.5 million in after-tax, asbestos-related payments this quarter, as opposed to $11.9 million last year, and it upped its liability reserves by another $15 million. It'll be interesting to see how RPM's new, more-aggressive stance plays out. For now, at least, it seems that the tradeoff of higher legal expenses and lower settlements is working out alright.

These shares aren't especially cheap, but the company pays a good dividend. I'd also suggest keeping an eye on the debt level and free cash flow generation. After all, solid brands and a good business are important, but fundamentals shouldn't be dismissed either.

More Takes on the world of chemicals:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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