Is This The Bottom for RPM International?

RPM International Ensures The Q3 Earnings Cycle Will Be Interesting

RPM International’s NYSE: RPM fiscal Q1 earnings report confirms that the calendar Q3 earnings season is going to be an interesting one if nothing else. While systemic challenges continue to plague the global supply chain businesses like RPM International are working hard to solve them. In the case of RPM International, this includes two recently-closed acquisitions and a new manufacturing facility that bodes well not only for RPM International but for the US economy as well. RPM International is investing in its domestic supply chain (as are many others) and that means more jobs and economic activity in the USA.

RPM International Exceeds Expectations

RPM International exceeded expectations but could have performed far better if not for the systemic challenges facing the market today. The company reports $1.65 in net consolidated revenue which is good for a gain of 2.5% over last year. The revenue beat the consensus by 120 basis points and could have been as much as 1200 basis points better if not for raw material shortages, freight disruptions, and labor issues. Regardless, sales are up 12% over the past two years and are expected to continue growing into the future.

On a segment basis, three of the four operating segments turned in positive results. The consumer group fell - 16%, - 20% organically, on the combined impact of supply chain disruptions and a tough comp over last year. Last year the consumer group grew by double digits so there was some pullback expected. The remaining segments, construction, specialty, and performance, grew by 17.7%, 15.2%, and 9.9% respectively.

Moving down to the earnings, the company reported a contraction of margins that resulted in a year-over-year decline in both GAAP and adjusted earnings. The good news is that GAAP EPS of $1.04 beat the consensus estimates by a penny while the adjusted $1.08 beat the consensus by $0.06. The company said it is planning to enact additional price increases to combat margin shrinkage so we expect to see earnings begin to recover as soon as the next quarter.

Looking forward, the company has provided some mixed guidance but the underlying fundamentals remain very positive. The company is guiding second-quarter revenue growth to the mid-single digits which is above the Marketbeat.com consensus estimate but EPS will contract by 15% to 25%. The EPS contraction is a major red flag but directly linked to the supply chain issues the company is working to mitigate. In our view,  the supply chain challenges will dissipate over time providing some upside risk in the EPS Outlook. As for lost business, our read on the economy at large is that demand continues to hold up so it's only a matter of time before lost business is recaptured.

RPM International Dividend Is Still Safe

RPM International earnings and cash flow were greatly impeded by supply chain challenges but the dividend remains safe. The current payout is about 1.9% with a payout ratio below 40% and a relatively healthy balance sheet to back it up. Investors may not want to hold their breath in regards to a dividend increase but we don't see a dividend cut in the cards right now. As for the potential for a dividend increase, RPM International has a long history of regular increases and one is due with the next declaration. It's very possible the company could increase the payout by another mid to low single-digit amount.

The technical Outlook: RPM International Is At A Bottom

Price action in RPM International is clearly showing a bottom. The question is if this is “A” bottom or if this is” The” bottom. In our view, this could be the bottom assuming the market focuses on revenue growth and potential for margin recovery versus the near-term headwinds facing the business. Price action is down slightly In the wake of the report but still above support at the $77.50 level where it is bottoming. Price action appears to be forming a double bottom at this level and that is supported by the indicators. The MACD and stochastic are showing strong entry signals that will be confirmed when and if price action moves above the short-term moving average. In that scenario, we see the potential for 25% upside with this stock.