RPM International Inc. (RPM) manufactures and sells specialty chemicals. The company sells worldwide in over 170 countries. It owns a plethora of name-brand specialty paints, industrial coatings, chemicals, and construction-related products. I hold a bullish position on RPM at the present time. (See Analysts’ Top Stocks on TipRanks)
Any slip in share price into the $80s makes this stock especially attractive, in my opinion. Its name brands like Rust-Oleum and Dap Caulks make RPM a safe investment. RPM is the sum of its parts.
RPM ranks 33 out of 37 companies in specialty chemicals. It ranks 205 out of 257 companies in the materials sector. As of October ’21, RPM ranks fourth on the list of paint coatings stocks trading on the NYSE.
RPM and companion companies in the paint and coatings business hold Neutral or Moderate Buy recommendations, in part, because their share prices are near all-time or 52-week highs.
Sensitive to Environmental Conditions
Certain conditions give pause to my bullish stance on the stock.
The industry is suffering the impact of global inefficiencies. An unsettling report recently released concludes between 2021-2026 market growth will be a hairline CAGR of 1.8%.
Ingredients to make paints and coatings are precisely the raw materials experiencing dramatic price increases from inflation: pigments, binders, solvents (liquids), and additives.
Paint and coatings are heavy loads to ship and ingredients are in great demand for manufacturing a wide range of consumer and industrial products. An 11% price increase for manufacturers in August 2021 is just the beginning.
The invigorated Green Movement demands cleaner and more expensive manufacturing and disposal solutions. Threats of more cost increases, supply chain barriers, and limits to product availability are major threats to revenue growth and EPS going into 2022.
Winds Uplift RPM
However, there are winds at the back of RPM that make it a worthwhile investment. The company raised its quarterly dividend by 5.3% last month. RPM increased its dividend for 48 consecutive years, but yields a paltry 1.78%. Its stock also regularly outperforms the S&P 500 (SPY).
RPM’s debt-to-equity ratio is a high 136%, but debt is being employed with acuity. RPM’s debt undergirds the company’s strategy of growth through acquisitions. It completed 175 over 30 years. Management completed over 60 acquisitions in the last decade.
RPM reported record Q1 2022 sales of $1.65 billion, an increase of 2.7% year-over-year. Net income was $134.6 million, but EPS was $1.04; that’s down 25% year-over-year. However, growth was a record 70% in Fiscal Year 2020.
Looking at its balance sheet, debt is well-covered by operating cash flow. Interest payments are covered by EBIT. This takes a lot of risk out of the equation for investors. Short interest, for example, is an extremely low 1.6%. Net debt is just under $2.5 billion against a market capitalization of $11.7 billion. Market volatility might incentivize management to pay down debt.
Patience and Potential
Investors must be patient. RPM stock is volatile, but this volatility is within a select range. Shares opened in 2021 at $90, sold for ~$80 in March, peaked in May around $98, tumbled to $77.65 to close September, and the price is on the upswing, getting above $90. Shares rose about 14% since the last earnings report.
Shares are up significantly since the company announced in 2018 that activist Elliott Management took a financial stake and interest in management. A new report suggests Elliott’s strategies are to increase debt, accelerate share buybacks, and leave target companies “smaller, weaker, and poorer.”
RPM hasn’t been left smaller and weaker, however, even though its share buyback ratio is higher than 61% of competitors in the chemicals industry.
There are more rewarding stocks to buy for a heftier dividend payout. The company is subject to lower returns if challenges afflicting Corporate America do not lessen.
Valuation is low, profitability is excellent, but can be shortcutted by supply shortages and higher operating costs, and the consensus among analysts is that momentum is sputtering and the stock is near its capstone price for the coming year.
RPM is an attractive investment for its penetration of the chemical and industrial coatings businesses, its hefty brand names portfolio, and its potential for strong earnings in an era of national infrastructure investment.
TipRanks’ Smart Score
TipRanks’ Smart Score rating system assigns RPM International a Neutral 7 out of 10, citing solid and fundamental factors and increased hedge fund activity.
Sentiment is growing bullish among news media, analysts, bloggers, and hedge funds. Funds are increasing their holdings.
Wall Street’s Take
Turning to Wall Street, RPM International has a Moderate Buy consensus rating, based on three Buys and three Holds assigned in the past three months. The average RPM International price target of $92.67 implies 2.4% upside potential.
Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article
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