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RPM Paints A Small Green Shoot

Posted: Oct 15, 2009 13:10 PM by Greg Sushinsky

Tickers in this Article: SHW, MAS, DOW, PPG, RPM

RPM International (NYSE:RPM), small cap specialty paint, coating and sealant maker, had a mixed first-quarter fiscal 2010 earnings report, with its industrial segment still off but its consumer business improving. Industrial sales, which accounted for 65.5% of the company's revenues, were off 14%, but its consumer sales, accounting for the remaining 34.5% of sales, increased by 12.5% from the year ago same quarter. With all the talk in the investment community about "green shoots," this appears to be a real one.

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More About RPM's Quarter
RPM has always been a well managed company which has integrated its various sometimes disparate-seeming acquisitions. It recently increased its quarterly dividend for the 36th consecutive year, by 2.5% to $0.205 per share.

Although the top line total revenues were down in the first quarter of 2010 compared to last year's first quarter, at $916 million versus $985.5 million, net income rose to $73 million from $69.5 million. This was 57 cents per diluted share compared to 53 cents last year's same quarter.

While industrial segment revenue fell from $697.6 million to $599.7 million, the consumer segment increased from $287 million in last year's first quarter to $316 million in this year's. After an extremely difficult year, RPM has found the consumer again, who's slowly making his way back.

Others Paint Their Pictures
Many of the paint and coating companies will be reporting their quarterly earnings soon, which will likely continue to be mixed. But the paint and coating companies have been responding to the recession in different ways, with each one positioned and performing a bit differently.

PPG (NYSE:PPG), for example, has attempted not just to tighten operations as most companies do during recession, but has focused on a program to train its middle managers to be liaisons and active agents of change, which the company hopes will lead to more efficiencies.

Dow Chemical (NYSE:DOW), though their coating business doesn't represent the same core emphasis as it does for RPM and other paint makers, was mentioned in an analyst's note as having its "coating business stabilized."

Masco (NYSE:MAS), the building and construction firm which produces Behr paints, has that segment performing well but is dragged down by its other poorly performing segments, while Sherwin-Williams (NYSE:SHW), mentioned as a "dividend aristocrat" is expected to continue its long productive run as it emerges out of the recession. (Learn more about building a portfolio around stocks with growing dividends in Build A Dividend Portfolio That Grows With You.)

Painting Their Prospects
RPM's industrial segment is still down, and much of Masco's non-paint divisions having to do with construction haven't bounced back, but RPM's news of the pickup in consumer trade in the paint business gives an intimation of the consumer edging back.

Is more expected? RPM's sequential quarter comparison in the first quarter this year versus the fourth quarter of fiscal 2009 (which ended May 31), showed a 6.8% increase in sales, despite RPM's first quarter historically being usually lower than its fourth. The net income for this year's first quarter breaks the previous record achieved by last year's first quarter income.

RPM Poised For Solid Growth
RPM has clearly bored through the worst of the recession. Despite its hard year last year, RPM's chairman and CEO Frank C. Sullivan has emphasized cost efficiencies, operations improvements and a positive outlook which suggests they'll be at the "high end" of their stated guidance "for full year earnings growth of 5% to 25% over the adjusted $1.05 earned in fiscal 2009."

With the consumer edging back and possibly ready to do more, investors need to look for the industrial customers to return and watch for signs of a real green shoot there. RPM stock, though, is fairly valued, priced near its 52-week high right now, so investors are watching the garden.

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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