Paint and coating specialist RPM International (NYSE:RPM) is set to report second-quarter 2007 earnings tomorrow, before the bell. This Fool is here to paint a background for the event.

What analysts say:

  • Buy, sell, or waffle? Only four Wall Street analysts cover RPM these days. Three of them have rated the stock a buy, and the fourth one says "hold it!" It's a four-star stock in our Motley Fool CAPS database, with 81 players offering their opinions.
  • Earnings. The average forecast, out of five ratings, calls for $0.33 per share, up from $0.23 a year ago. Management did not hand out earnings guidance.
  • Revenues. There are only two analysts who offer a revenue forecast this time. Their views differ by just 0.7%, so let's call the $810.4 million average figure a consensus.

What management says:
In the latest earnings report, CEO Frank Sullivan said that he expects raw material costs and a weak consumer products market to present challenges going forward, but he remained optimistic. Major retailers should return to their normal buying patterns after a period of unpredictable orders, and the company should be able to pass on some of its higher costs to customers. The industrial segment is riding high on "overall industrial and commercial vitality," and that should continue as well.

What management does:
You can see the impact of higher materials costs in the gradual gross margin decline. Operational margins remained remarkably stable despite the gross margin pressure, but the bottom line didn't hold up quite as well. That's the result of a $335 million legal settlement charge against net income two quarters ago. The long-running asbestos lawsuit won't be a concern any longer.

Margins %

05/05

08/05

11/05

02/06

05/06

08/06

Gross

43.3%

42.7%

41.9%

41.6%

41.6%

41.3%

Oper.

10.8%

10.9%

9.8%

9.6%

10.1%

10.0%

Net

4.1%

3.8%

4.0%

3.9%

(2.5%)

(2.1%)


Capital IQ uses operational earnings (EBIT) for return on assets calculations, but net income from continuing operations when looking at return on equity. That's why the two metrics diverge at the asbestos settlement date.

Efficiency Ratios

05/05

08/05

11/05

02/06

05/06

08/06

ROA

6.9%

7.0%

6.4%

6.6%

6.7%

6.8%

ROE

10.4%

9.5%

10.2%

10.6%

(7.8%)

(6.3%)

YOY Rev. Growth

10.8%

10.6%

13.5%

15.4%

17.7%

17.5%

YOY Earnings Growth

(26.0%)

(32.4%)

(10.3%)

0.2%

N/A

N/A
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
This two-time Income Investor selection proved its mettle again this summer, by paying out that large asbestos settlement -- and raising its dividend. That's 33 straight years of dividend increases, whether the paint runs dry or flows aplenty. The company now pays investors $0.70 per share annually, fully funded by free cash flow. Yes, even in the settlement quarter. RPM paints a picture of stability that's hard to match.

On top of that, revenues are growing at a healthy clip. As you can see from the stable operating margins, most of that is preserved down to operational income. It's that last step to the bottom line that is proving tricky.

Customers/Suppliers/Competitors:

  • PPG Industries (NYSE:PPG)
  • Sherwin-Williams (NYSE:SHW)
  • DuPont de Nemours (NYSE:DD)
  • Masco (NYSE:MAS)
  • Rohm & Haas (NYSE:ROH)
  • Valspar (NYSE:VAL)

Further Foolishness:

RPM is a Motley Fool Income Investor selection. Grab a free 30-day trial and go off to explore the wealth of reliable income generators.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure covers in one coat.