move up but stay still
RPM International Corporation (NYSE: RPM) is a stock that beats the odds. Nine out of 10 Seeking Alpha analysts have a hold rating on the stock between April 2021 and July 2023. 1 other Rate it a “Buy.” Despite Seeking Alpha’s conservative assessment and long-term hold quantitative rating, the stock is currently trading at +$100 per share, not far from its 52-week high.
In Jul’23, the company’s shares rose 9.7% after its latest quarterly earnings report beat most analysts’ expectations. We currently work with 8 of 14 Wall Street analysts to assess the stock as the best hold for retail value investors.
Buy RPM International and paint the town red in our last article SA, the stock is an opportunity even though it is selling at a then-52-week high of $56.69. While we’re not bearish on RPM’s continued revenue growth and potential share price upside, we caution retail value investors to wait. We expect the share price to pull back. Shares traded around -5% since the last earnings report.
We believe investors have already factored in the news from the last earnings report. They expect earnings per share to be better for the quarter than a year ago. We believe that when the company next reports on October 4, 2023, 1Q23 EPS will beat last year’s $1.47. The company’s EPS could rise by $0.08 to $0.10 due to the announced cuts in RPM operating costs. Revenue may be lower next quarter based on weak demand forecasts and data reports.
In its 4Q23 earnings report for the period ending 31 May 2023, revenue rose 1.6% YoY. The company beat consensus estimates of $1.98B, but net income fell 24% to $1.18 per share, compared with $1.54 per share a year earlier. Adjusted earnings per share of $1.36 beat estimates of $1.29 and helped lift RPM stock.
paid a high price
The stock is down about 7% from its August 2023 52-week high of $107.40. Shares are up 190% over the past 10 years, 48.5% over the past 5 years, 7% over the past 12 months, and 2.5% year-to-date. We believe the state of the coatings industry reflects the health of the macro economy.
After the next earnings release, the stock price could fall further. For retail value investors, this will be a potential opportunity. The stock has a beta of almost 1, adding to the downward pressure on the stock and giving us a Hold rating in the near term. Market outlook sentiment and views for the rest of the year range from strong to mixed to worrisome. From our perspective, the market is moving from mixed to worrisome, and stocks with higher dividend yields and stronger earnings are more worthwhile for small and mid-sized investors. As a result, RPM stock could fall back into the low-$90s range again this year, as it has been in the doldrums from January to July 2023.
Second, SA has had a Quantitative Hold rating for a year now, with one exception, when it assessed the stock as a Sell. Quantitative ratings are again skewed to the sell side. The valuation factor grade is D-, as valuation metrics are largely weak.
The third reason we are conservative on RPM International is the mixed growth outlook in RPM International’s key markets. The company has 121 factories for production. RPM markets its specialty chemicals, architectural and industrial paints and coatings, waterproofing and roofing systems, consumer products, and other building materials to the retail DIY, construction, industrial development, and maintenance segments. Nearly 80% of its sales come from North America.
BusinessResearch.com’s Industrial Maintenance Services Market Size, Trends, and Global Forecast to 2032 forecasts that the industrial maintenance and services market will grow at a CAGR of 7% annually. The DIY and hardware store market is projected to grow only 2.63% per year.
A new Dodge report claims
- Economic growth is slowing sharply due to aggressive rate hikes by the Federal Reserve. Uncertainty in the banking sector and stubborn inflation are big risk factors this year.
- Dodge predicts U.S. economic growth will slow to just 0.9% in 2023, bringing the economy dangerously close to recession.
- Higher material prices and persistent labor shortages will continue to weigh on the construction sector and dampen growth this year.
- Single-family home construction to drop another 6%…Multi-family starts to drop 2% in 2023…
- Commercial construction activity will see a marked decline in 2023, starting with a 5% decline…
Fourth, corporate insiders executed 19 sell trades in the last 3 months compared to 40 last year, compared to 7 and 18 buy trades. Their net activity resulted in 140,000 more shares sold than bought in the past three months, and 246,600 more shares sold than bought in the last year. While hedge funds have increased their holdings in the past three months, about 20% of the number of funds holding stocks in the fourth quarter of 2022 have sold and have not bought again in 2023.
Finally, the dividend is safe, but the 1.6% yield is negligible. The payout ratio is a whopping 38%, but with RPM holding about $223M in cash and equivalents and over $3B in total debt, we can’t foresee the company increasing its dividend in the near future.
Most of the debt was created to acquire 40 companies, 10 of which were acquired in the past 5 years. 44% are chemicals and 21% are construction materials. Acquisitions are a key strategy for RPM’s growth, so we expect debt to continue to grow.
Its market cap is close to $13B. EBIT rose by around 23 percent in the last fiscal year. Free cash flow from operations through May 2023 and TTM totals $577.1 million, so the dividend is paid and the company should be able to manage interest and debt.
Overall, we believe RPM International is a strong company with a stable outlook and little risk of a significant share price decline. The PE is 20.4, and the short interest is as low as 1.36%. The economy it depends on may also be improving. According to Wolf Richter’s analysis of relevant economic news for SA,
Over the past two years, factory construction spending has doubled as a share of total nonresidential construction spending, from 8.9% in July 2021 (roughly unchanged from pre-pandemic years) to 17.4% in July 2023.
Management is focusing heavily on acquisitions and, under the banner of MAP 2025, through negotiations with shareholders to increase the efficiency of shareholder ROI and ROE. Any serious risks are external to the macroeconomy, not internal. From our personal experience, the paint industry in the US is healthy; for example, the stocks of the two largest paint and coatings manufacturers in the US are doing well, but SA has a “hold” rating on the shares of these two companies. It’s the high share price combined with low-grade valuation metrics, unattractive dividend yield and growth history, and debt that drive us to rate the stock a Retail Value Investor Hold. The company’s outlook for the next year could be even brighter.