RPM International And The Two-Edged Sword Of Inflation

Mixed Results For RPM International

RPM International (NYSE: RPM) had a mixed quarter and one that reveals the two-edged sword of inflation. The company grew revenue and at a pace above consensus but the gains are more to do with pricing increases than anything else. Yes, demand is holding up on a YOY basis and even growing a wee bit but not enough to account for the revenue gains and the news is worse on the bottom line. Not only is inflation goosing the top line but it is cutting into the bottom line as well. While revenue is up YOY and beating the Marketbeat.com consensus estimate but the earnings are contracting and missing the estimates.

Hurdles And More Hurdles For RPM International 

As if the inflationary environment wasn’t enough of a hurdle for RPM International the company is also wrestling with supply-chain issues and material availability. The company estimates supply-chain issues cost them $0.200 billion in lost revenue or about 1200 basis points more than what was reported. Regardless, the $1.64 billion in revenue is up 10.1% over last year and beat the consensus by 510 basis points. 

The good news is that demand was better than expected, the bad news is that high single-digit pricing increases account for most of the gain. On a segment basis, three of four operating segments grew by double digits while only one, the Consumer Group, saw a decline. Sales in the Consumer Group were deeply impacted by supply chain disruption. 

Moving down to the bottom line, the company’s GAAP EPS of $0.96 missed the Marketbeat.com consensus by two cents which isn’t that bad but there is another factor to be aware of. The $0.96 is down only a few percentage points on a YOY basis but is impacted by the sale and leaseback of a facility. Discounting that, GAAP earnings are down more than 21% and that is reflected in the adjusted results as well. The adjusted $0.79 is down $0.27 or 25% from last year and missed by a nickel. 

Looking forward, the guidance is equally mixed. The company is expecting to see a double-digit increase in revenue for the Q3 period but earnings are going to fall as inflation continues to drive price increases and cut into results. 

RPM International’s Dividend Is Safe 

RPM International issued its dividend declaration just before the release of earnings and maintained the payment and the new rate of $0.40 quarterly. This is worth 1.65% annually and appears to be safe enough although there are some red flags on the balance sheet. The balance sheet is carrying some debt and is moderately to highly leveraged. The mitigating factor is that dividends are running at 42% of the consensus and there is still room on the books for another increase. Assuming earnings do not deteriorate further we see no reason why investors should not expect another distribution increase at the start of the next fiscal year. 

The Technical Outlook: RPM International Is In Uptrend, For Now

Shares of RPM International began pulling back even before the Q2 results were released and may continue to do so in the near to short-term. The key support is at the short-term moving average which is just below the pre-release closing price. Price action is edging lower in pre-market action but appears to be holding up above the EMA. Assuming the EMA is not broken the uptrend is intact so this pullback should lead to another new high fairly soon. If not and the EMA fails this market may move down to the $93 and $90 levels.