RPM International: Revenue Growth Is Needed To Trigger Further Gains

| About: RPM International (RPM)

Shares of diversified chemical producer RPM International (RPM) ended Thursday 0.7% lower despite opening 3% higher after reporting its third quarter earnings.

Third Quarter Earnings

RPM reported a 14% increase in its net revenues to $774 million. Net income increased from a mere $1 million last year to $6.6 million in 2012, resulting in earnings per share of $0.05

"Most of our industrial product lines, both domestically and in Europe, posted gains in sales and EBIT, with high-performance industrial coatings and maintenance products continuing to perform exceptionally well", according to CEO Sullivan.


The company reaffirmed its 2012 outlook. The company continues to expect earnings per share growth in the range of 10-15% compared to last year's $1.45 earnings per share. Analysts were expected a guidance increase to $1.73 per share, roughly 19% higher compared to 2011. The slightly disappointing reaction of RPM's shares is largely attributable to the conservative guidance which RPM released for the remainder of the year, although CEO Sullivan is already confident about sales and earnings growth for the fiscal year of 2013.


The company ended its latest period with $270 million in cash and roughly $1.1 billion in debt. With a market valuation of $3.4 billion the company is valued at 1.0 times annual revenue and 18 times annual earnings.

For the first nine months sales came in at $2.7 billion, up 11% on the year. Net income rose 12% to $133 million with earnings per share coming in at $1.02. The guidance implies fourth quarter earnings of $0.58-$0.63 vs. 2011's earnings of $0.54 for its final quarter.

Investment Thesis

Investors in RPM have had a great run. Shares hit all time highs a little over $25 in recent weeks from lows of $10 in 2009. On top of large capital gains, investors also receive a healthy dividend yield of 3.3% per year.

Despite little additive acquisitions, the company did not manage to significantly raise its revenues. All earnings growth and share appreciation are driven by margin expansion from a mere 1.2% in 2008 to over 5% in 2011.

Investors can continue to hold on to their shares, receiving a generous dividend yield, but there are few triggers for further share price appreciation unless revenue growth returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.