Analyzing RPM International’s cost of sales
The cost of goods sold includes the direct cost associated with manufacturing a product but does not include selling and distribution expenses. In 2011, the cost of sales represented 58.6% of the RPM International’s (RPM) total revenue. In subsequent years, the figure declined further, and in fiscal 2016, the cost of sales represented ~56.6% of the RPM’s total revenue.
However, in absolute terms, RPM’s cost of sales grew at a CAGR (compound annual growth rate) of 6.6%, while the revenues grew at a CAGR of 7.3% from 2011 to 2016. PPG Industries (PPG), Sherwin-Williams (SHW), and Valspar (VAL) reported costs of sales of 56%, 51%, and 64.7%, respectively, of their total revenues.
RPM was able to reduce its cost of sales mainly due to lower petroleum-based raw material costs. But RPM continues to face currency challenges as its foreign operations pay their raw material suppliers in dollars. RPM also sees that other raw materials are facing upward pressure, and in the long term, it expects raw materials costs to increase.
The other important component influencing margins is SG&A (selling, general, and administrative) expenses. In the past five years, RPM International’s SG&A expenses have grown at a CAGR of 7.7%, while RPM Industries’ sales grew at a CAGR of 7.3%.
In 2011, SG&A expenses constituted 31.1% of RPM’s total revenue. In fiscal 2016, its SG&A expenses rose to 31.6% of total revenues. SG&A expenses rose in 2016 mainly due to employee compensation expenses, including commissions on higher sales.
Investors can indirectly hold RPM International by investing in the iShares US Basic Materials ETF (IYM), which had 1.3% of its total portfolio in RPM International on September 28, 2016.
In the next part, we’ll analyze the capital spending trend of RPM.