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Weathering the Storm
10/08/2008 11:00 am EST
Vahan Janjigian, editor of Forbes Growth Investor, says an industrial chemical company has the right products and staying power in this tough market.
RPM International (NYSE: RPM) makes and markets paints, coatings, roofing, sealants, and adhesives for the industrial, commercial, institutional, residential, automotive, and marine markets. Approximately 37% of fiscal 2008 sales were generated outside of North America.
The industrial segment, which accounted for 65% of fiscal 2008 sales, sells products to contractors, distributors, manufacturing facilities, educational and governmental institutions, and commercial entities. It sells roofing and weatherproofing products and services, sealants and tapes, polymer flooring, fiberglass-reinforced plastic gratings and moldings, and corrosion control and fireproofing coatings. Among its brands are Tremco, Vulkem, Tuff-N-Dri, and Day-Glo fluorescent pigments.
The consumer segment generated 35% of fiscal 2008 sales. It sells products to professionals and do-it-yourselfers to repair, maintain, and improve homes. These products are sold at mass merchandisers, home centers, hardware and paint stores, and hobby shops.
Offerings include protective and decorative coatings for wood and metal surfaces, caulks, sealants, adhesives, mold and mildew prohibitors, wallpaper application and removal products, and hobby paints and cements. Well-known brands include Rust-Oleum, Mohawk, and Wolman. This segment even sells Nature Seal, a coating used to preserve pre-cut produce.
Fiscal fourth quarter net sales increased 7% year-over-year to $1.08 billion. Organic growth was 1.4% thanks to both price increases and volume gains. The gross profit margin remained flat at 42.35% as price increases and volume growth offset higher raw material and energy costs.
Due to a $288.1 million pre-tax, non-cash asbestos-related charge, RPM recorded a GAAP net loss of $87.56 million, or 73 cents per share. Pro forma net income grew 16.1% to $97.49 million or 75 cents per share.
Investment risks include further asbestos-related charges and a significant economic slowdown. Yet RPM has demonstrated an ability to post growth in a slowing economy. Key industrial product markets, including oil and gas, utilities, infrastructure, and health care should hold up well even in a weak economy.
Consumer products will face more difficulty, yet should remain stable thanks to the resilient market for small home improvement projects. Because the housing market is unlikely to bottom before the spring of 2009, sales of products related to large-scale home projects could suffer. High raw material costs will also pose a challenge.
Nonetheless, the company is calling for year-over-year organic revenue growth of about 6% for fiscal 2009. Pro forma earnings should also rise about 6% to $1.85 per share. Now that raw material prices are falling, actual results could be better. Acquisitions will also contribute to the company’s growth and help it reach its $5 billion annualized revenue target by fiscal 2010. (The stock closed at around $15.50 Tuesday—Editor.)
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