What to Expect From RPM International’s (RPM) Q2 Earnings

RPM International Inc. RPM is scheduled to report second-quarter fiscal 2019 results on Jan 4.

In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate by 39.5%. In fact, RPM International missed the consensus mark in two of the trailing four quarters, with average negative earnings surprise of 13.2%.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is currently pegged at 66 cents, remaining unchanged over the past 30 days. This reflects a decrease of 5.7% from the year-ago earnings of 70 cents per share. Revenues are expected to be $1.4 billion, up 6.1% year over year.

Let’s see how things are shaping up for this announcement.

Key Factors

Rising raw material costs have been marring the company’s bottom line over the past few quarters, thereby creating pressure on gross margins. Particularly, cost of silicones, asphalt, epoxy and acrylic resins is increasing significantly. Gross margin in the fiscal first quarter decreased 190 basis points year over year. Resultantly, the company’s earnings decreased 39.5% in the last reported quarter to 52 cents. Also, unfavorable foreign exchange, one-time legal costs and additional charges related to 2020 Margin Acceleration Plan added to the woes.

RPM International anticipates these trends to persist in the fiscal second quarter as well.

That said, the company has been aggressively pursuing price increases to offset the increasing material prices and protect its gross profit margins. The company anticipates an improvement between its raw material costs and pricing & product mix, starting from the fiscal second quarter.

Meanwhile, RPM International’s cost-saving initiatives bode well for its bottom-line performance. The company has been undertaking various initiatives to reduce expenses. The initiatives include plant-consolidation plans primarily at Rust-Oleum, merging IT system, centralizing more of its back-office functions and rationalizing its manufacturing footprint. The company is expected to benefit from strategic acquisitions.

Segment-wise, the Zacks Consensus Estimate for Industrial segment revenues (accounting for more than 50% of its total revenues) is pegged at $732 million, indicating a rise from $703 million recorded in the year-ago quarter but decline from $782 million in the last reported quarter. The segment is expected to gain from robust construction activity, stable international environment outside Brazil and the North American waterproofing business.

The consensus estimate for Specialty segment’s revenues is pegged at $205 million, reflecting a year-over-year improvement of 4.1% and sequential growth of 6.2%.

Meanwhile, the company’s Consumer segment revenues are estimated to reach $449 million, reflecting an increase from $415 million in the year-ago quarter, while declining from $485 million in the last reported quarter. Improved product line, market share gains, higher advertising campaign for new product placements and the recent purchase of Miracle Sealants are expected to drive growth.

What Our Model Indicates

Our proven model does not suggest that RPM International is likely to beat estimates in the quarter to be reported. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here, as you will see below.

Earnings ESP: The Earnings ESP for the company is 0.00% as the Most Accurate Estimate and the Zacks Consensus Estimate are both pegged at 66 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: RPM International currently has a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

Here are some companies in the construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarterly reports:

D.R. Horton, Inc. DHI has an Earnings ESP of +2.75% and carries a Zacks Rank #3. The company is slated to report quarterly numbers on Jan 25, 2019.

KBR, Inc. KBR has an Earnings ESP of +12.75% and holds a Zacks Rank #3. The company is expected to report quarterly numbers on Feb 22, 2019.

MasTec, Inc. MTZ has an Earnings ESP of +0.47% and also carries a Zacks Rank #3. The company is expected to report quarterly numbers on Feb 26, 2019. You can see see the complete list of today’s Zacks #1 Rank stocks here.

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