RPM International: The Pullback Has Granted an Entry Point

Shares of RPM International Inc. (

RPM, Financial) are lower by 12% over the last six months compared to a return of 7.8% for the S&P 500 index.

The decline isn’t necessarily business related, as revenue grew nearly 11% and adjusted earnings per share was higher by 36% in the most recent fiscal year. Inflationary costs have been higher than usual, but the company had been able to pass much of these costs along to customers.

However, it is likely that higher input costs combined with a tough comparison from the prior fiscal year will lead to a decline in earnings per share for fiscal 2022. That said, RPM International is an industry leader in specialty chemicals and has an excellent dividend growth history, making the decline in the share price very attractive in my opinion.

Let’s dig deeper to see why the pullback could be a good opportunity to purchase shares of RPM International.

Quarterly highlights

RPM International reported earnings results for its first-quarter of fiscal year 2022 on Oct. 6 (the company’s fiscal year ends May 31). Revenue grew 2.7% to a new first-quarter record of $1.65 billion, $17 million higher than what Wall Street analysts had expected. Adjusted earnings per share of $1.08 was a 36 cent, or 25%, decrease from the prior year, but came in 6 cents above estimates.

The decline in earnings per share is largely attributed to a tough comparable period in the first quarter of fiscal year 2021 and higher input costs.

Revenue for the Construction Products Group improved 17.7% to $644 million, with almost every business within the segment showing growth from the prior year. This segment took market share in a number of areas that, when combined with cost controls and higher selling prices, helped drive gains. Standout performers included roofing systems, concreate admixtures and repair products. The company’s HVAC restoration platform was also up during the quarter.

The Performance Coating group grew almost 10% to $286 million. Again, all major businesses were up year-over-year. Outside of the energy sector, industrial maintenance was in high demand. RPM International’s purchase of Bison, a manufacturer of raised flooring systems, was also a tailwind to results. Better mix and higher prices also contributed to results.

The Specialty Products Group improved 15.2% to $182 million. Marine coatings were in especially high demand, as were powder coatings, disaster restoration equipment, wood stains and sealers. Cabinet, furniture and RV businesses also did well. Supply chain interruptions were a slight headwind.

The Consumer Group was the lone segment to decline as revenue fell 16% to $538 million. However, this comparison is somewhat unfair because the first quarter of fiscal year 2021 was one of the best periods of time ever for this segment. Revenue grew 33% last year as RPM International had incredible demand for products in this category. Compared to fiscal year 2020, this segment grew in the low double-digits, so business is much improved from pre-pandemic times.

RPM International expects that the trends seen in the most recent quarter are likely to continue into the current quarter. Almost all segments are expected to have revenue growth in the double-digits in the second quarter. The lone segment expected to decline is the Consumer Group, which will be going up against last year’s 21% gain.

The company also announced a 5.3% dividend increase for the upcoming Oct. 29 payment date. This extends RPM International’s dividend growth streak to 48 years, putting the company just two years shy from achieving Dividend King status. There are just 30 or so companies with the five decades of dividend growth needed to earn the title of Dividend King, so achieving this feat would be a testament to the company despite its somewhat cyclical nature. Shares yield 2% compared to the 1.3% yield that the S&P 500 index averages.

Takeaways and valuation analysis

At first glance, the decrease in earnings per share is worrisome, but RPM International was facing an incredibly difficult comparison from the first quarter of fiscal year 2021. That quarter produced what was then record for revenue and the best showing for earnings per share that the company has ever seen.

This can be attributed to RPM International experiencing a significant benefit from the reopening of the economy and the relaxation of stay-at-home directives in many of the company’s markets during this period of time. The pent-up demand drove very strong growth on both the top and bottom lines last year.

Inflation pressures, a scarcity of raw materials and acute supply chain headwinds were an issue in certain businesses during the quarter and yet, three out of four business still posted at least 9.9% revenue growth. The fourth business, the Consumer Group, did decline at a mid-double-digit rate, but this was due to a very high increase in revenue in the same period last fiscal year. In this light, the year-over-year decrease isn’t as bad as it seems on the face of it.

Despite all of these issues, RPM International is still ahead of where its business was before Covid-19 entered into the picture.

Overall, quarterly sales are higher by the low double-digits, with three out of four segments showing gains compared to fiscal year 2020. The Construction Products Group, Specialty Products Group and the Consumer Group were up 20.2%, 13.7% and 12.3%, respectively, compared to the first quarter of fiscal year 2020.

All three of these businesses are much improved from where they were before the pandemic. The only segment that decreased was the Performance Coatings Group, which was down just 3.9%, and this decrease is almost entirely due to the exiting of low margin businesses that took place that year.

Shares closed the Thursday trading session at $80. Using analysts’ estimates for the year, RPM International has a forward price-earnings ratio of 20. According to Value Line, shares have five- and 10-year average price-earnings ratios of 20.8 and 18.9, respectively. The stock looks somewhat overvalued using the long-term historical valuation, but slightly undervalued using the medium-term multiple.

Using GuruFocus’ estimate of intrinsic value, the GF Value line, RPM International appears fairly priced.

RPM International has a GF Value of $81.87, giving the stock a price-to-GF-Value ratio of 0.98. Looking at the chart above, we can see that the stock has dropped from overvalued territory since the decline in share price.

Final thoughts

RPM International put together another quarter where most business segments showed strong growth versus the prior year. The Consumer Group did incredibly well last year, so the comparable figure was always going to be difficult to top. Even better, most businesses performed better than they did two years ago.

Shares of RPM International aren’t necessarily cheap, but they aren’t expensive either. The company has proven that it is a quality name that can be very resilient to headwinds that include a pandemic and higher raw material costs. This helps explain why the company’s dividend growth streak numbers nearly five decades.

For these reasons, I believe an investor looking for an entry point should considering using the double-digit pullback to purchase shares of RPM International here.