RPM International Puts The Reversal Into Higher Gear

RPM International Moves Higher On Accelerating Forecast

RPM International (NASDAQ: RPM) has been on our radar not only because it is so well positioned for the post-COVID economic recovery and expansion but because it is a telling indicator of economic conditions. The company makes paints, coatings, and specialty products for the construction, industrial, and consumer groups and is not only a leading cost for many parts of the economy but on the front line of inflationary pressures impacting businesses throughout the system. The takeaway from the FQ3 report is the company has and is navigating the global supply chain issues well, but those conditions are worsening in the near term. This means growing business for RPM International now, but there is a growing chance the economy is about to stall.

“RPM’s operations and those of its suppliers are expected to be impacted by ongoing supply chain challenges and raw material shortages, which will exert pressure on revenues and productivity. . . While RPM’s sales to Ukraine and Russia are immaterial, the Russian sanctions are exacerbating inflation of energy and transportation costs. They are also creating supply challenges for plant-based raw materials, as well as those that are derivatives of oil. Although it is too soon to discern, rising interest rates may slow business and consumer spending in the coming months.”

RPM International Has Record-Setting Quarter

While no mention was made of higher pricing for its products, RPM International’s record-setting quarter is driven in part by demand and in part by higher prices. The good news is the $1.43 billion in revenue is up 12.6% from last year and beat the consensus by 140 basis points, the bad news is that business could have been better if not for supply chain challenges. The strength was driven by growth in all segments led by a 21.7% increase in Construction followed by a 19.6% increase in Performance Coatings, an 11.9% increase in Specialty Coatings, and a 2.9% increase in the Consumer Group.

Moving down the report, the company logged a small 2.3% increase in YOY EBIT thanks to higher pricing but both the net income and diluted earnings are down from last year. The reason is due primarily to restructuring costs, one-off items, and higher input costs that left the GAAP earnings at $0.25 and down 13.8% from last year. On an adjusted basis, things look much better but the impact of inflationary pressures is still present. The adjusted EPS of $0.38 beat the consensus by $0.08 but is only flat versus last year.

Looking forward, the company is expecting to have a strong Q4 supported by strength in most end markets. The company is guiding for revenue and EBIT growth in the low teens which would be the 4th quarter of accelerating growth, a company record, and on top of last year’s 19% increase.

The Technical Outlook: RPM International Is In Reversal

Shares of RPM International hit a bottom in March and are now confirming a reversal. The post-release price action has the shares up more than 4.0% and above a key resistance point that is coincident with the short-term moving average. Price action may consolidate at the fresh highs or even pull back to retest support at $84 before moving higher but we are expecting to see higher prices. Our target for the stock is near the $92 level in the near term with a chance of moving higher if the news and data support a positive outlook.