RPM - RPM International: Unattractive Landscape For Small Investors

2023-09-05 21:30:43 ET

Summary

• RPM International Inc. stock gets a Hold rating for a number of factors we consider.
• The stock price may experience a pullback after the next earnings announcement, presenting a potential opportunity for retail value investors.
• The company's growth outlook is mixed, with weak market conditions in some of its primary markets and possibly the national economy.

Movin-on Up But Hold

RPM International Inc. ( RPM ) is a stock that beats the odds. Between April 2021 and July 2023, 9 out of 10 Seeking Alpha analysts stamped the stock with a Hold Rating. 1 other assessed it as a Buy. Despite the conservative assessments and a long-time Hold Quant Rating from Seeking Alpha, the stock price currently stands at +$100 per share which is not far from its 52-week high.

In July ’23, shares popped 9.7% following its latest quarterly earnings report beating the estimates of most analysts. At this time, we assess the stock to best be considered a Hold for retail value investors along with 8 of 14 Wall Street analysts.

In our last article, Buy RPM International And Paint The Town Red for S A, the stock was an opportunity, though selling at its then 52-week high of $56.69. While we don’t bet against RPM’s continuing revenue growth and a potential rise in the share price, we are cautioning retail value investors to wait. We expect a share price pullback. The price is about -5% since the last earnings report.

In our opinion, investors already factored in news from the last earnings report. They are anticipating a better EPS in this quarter than in the same quarter last year. We believe the company will top last year’s $1.47 EPS for Q1 ’23 when it next reports on October 4, 2023. It might be $0.08 to $0.10 higher because of announced cost-cutting in operations at RPM. The following quarter's revenue is probably going to be lower based on soft demand forecasts and data reports.

In its Q4 ’23 earnings report ending May 31, ’23, revenue was reported +1.6% Y/Y. The company beat the consensus estimate of $1.98B but net income fell 24% to $1.18 a share versus $1.54 a share a year earlier. The adjusted EPS of $1.36 beat estimates of $1.29 and helped drive up the RPM share price.

High Price To Pay

The shares are ~7% off the August ’23 52-week high of $107.40. Shares are up 190% over 10 years, 48.5% over the last 5 years, 7% over the last 12 months, and 2.5% YTD. We believe the paint industry's status reflects the health of the macroeconomy.

The share price might fall further after the next earnings announcement. It will be a potential opportunity for retail value investors. Adding to the downward pressure on the stock and our Hold rating in the near term is its Beta of almost 1. The market outlook for the remainder of this year has sentiment and opinions from strong, to mixed , to worrisome . From our perspective, the market is tilting from mixed to worrisome, and stocks with a higher dividend yield stronger earnings are more worthwhile for small investors. Thus, RPM’s share price can slip back into the low $90 range again this year, as it languished from January into July 2023.

Second, the S A Hold Quant Rating has been in place for a year with one timely exception when it assessed the stock as a Sell. The Quant Rating scale is leaning to the Sell-Side again. The valuation Factor Grade is D- because the valuation metrics are largely weak.

Our third reason for our conservative position on RPM International is the mixed growth outlook for RPM International’s primary markets. The company manufactures in 121 facilities. RPM sells its specialty chemicals, architectural and industrial paints and coatings, waterproofing and roofing systems, consumer goods, and other building materials for retail DIY, construction, industrial development, and maintenance sectors. Nearly 80% of its sales are in North America.

The Industrial Maintenance Services Market Size, Trends and Global Forecast To 2032 from BusinessResearch.com forecasts the industrial maintenance and service market to grow annually at a CAGR rate of 7%. The DIY and Hardware Store market is expected to grow annually by just 2.63%.

A new Dodge Report claims

• Economic growth is slowing considerably, pushed lower by the Federal Reserve’s aggressive increases in interest rates. Uncertainty about the banking sector and stubborn inflation are significant risk factors for the year.
• In 2023, Dodge predicts that U.S. economic growth will slow to just 0.9%, bringing the economy dangerously close to recession.
• Higher material prices and continued labor shortages will remain a drag on the construction sector and will dampen growth in the current year.
• Single-family construction will decline another 6%... Multifamily starts will dip 2% in 2023…
• Commercial construction will see a pointed falloff in activity during 2023 as starts to decline 5%...

Fourth, corporate insiders executed 19 sell trades over the last 3 months and 40 over the last year compared to 7 buys and 18 buys, respectively. Their net activity resulted in 140K more shares sold than bought in the last three months and 246.6K more sold than purchased in the last year. While hedge funds increased their holdings over the last three months, about 20% of the number of funds owning shares in Q4 ’22 sold out and did not buy in again in 2023.

Finally, the dividend is safe but the yield of 1.6% is negligible. The payout rate tops 38% but with RPM holding ~$223M in cash and equivalents and total debt over $3B, we cannot foresee the company growing the dividend in the near future.

Much of the debt has been built to cover the acquisitions of 40 companies, 10 in the last 5 years. 44% were in chemicals and 21% in building materials. Acquisitions are a key strategy in RPM’s growth, so we expect the debt to continue to grow.

Its market cap is near to $13B. EBIT grew some 23% in the last fiscal year. Free cash flow from operations as of May 2023 and TTM totaled $577.1M, so the dividend is covered and the company ought to be able to manage the interest and debt.

Takeaway

Overall, we believe RPM International is a strong company with stable prospects and little risk of a serious drop in the share price. The PE is 20.4 and short interest is a low 1.36%. The economy it depends on might be improving, too. According to Wolf Richter's analysis for S A on pertinent economic news,

Factory construction spending’s share of total nonresidential construction spending has doubled over the past two years, from a share of 8.9% in July 2021, which was roughly in line with the years before the pandemic, to a share of 17.4% in July 2023.

Management is focusing on acquisitions and, under the banner of MAP 2025, efficiencies to improve shareholder ROI and ROE in talks with shareholders . Any serious risks are extrinsic from macroeconomics rather than from intrinsic factors. The paint industry in the U.S. is, in our personal experience, healthy; for example, the stocks of America’s top 2 paint and coatings manufacturers are doing well, yet S A has a Hold Quant Rating on both. It is the high share price coupled with low-grade valuation metrics, an unattractive dividend yield and growth history, and the debt that pushes us to rate the stock a Hold for retail value investors. The company might have a prettier picture going into the next year.

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