The last time I looked at RPM International Inc. (RPM, Financial) was right after the company reported its fiscal first-quarter 2022 earnings results this past October. At that time, the stock was down a double-digit amount over the trailing 12-month period.
I felt that this presented an opportunity for investors who were interested in the company to get in at a value price. Since then, the pullback has reversed and RPM International’s share price has surged 15%.
The company recently released earnings results, making this an appropriate time to reflect on RPM International’s performance and whether it is overvalued, undervalued or fairly valued at current levels.
Earnings highlights
RPM International announced results for its second quarter of fiscal year 2022 on Jan. 5. Revenue grew 10.3% to $1.64 billion, topping Wall Street analysts’ estimates by $85 million. Adjusted earnings per share of 79 cents was 27 cents, or 25.5%, lower than the prior year and 4 cents below expectations.
The Consumer Group was the lone segment to see a decline in sales, with the top-line falling 3.3% to $529 million. This was still the second-best performance in the segment’s history. This business grew more than 21% in the prior year, making the comparison very tough. Leadership noted that inventory was low in many markets as demand remains elevated amid material shortages. The company estimates that shortages of key raw materials likely lowered results by $100 million.
The Construction Products Group was the best performer, with sales growing 22% to a record $614 million. Demand in North America, which was muted last year due to Covid-19, was very strong. Construction and maintenance product lines performed very well, especially insulated concrete, roofing systems, repair products and commercial sealants. Emerging markets have begun to recover, but European results were flat versus the prior period. Better volumes and higher selling prices more than offset higher input costs.
Performance Coating grew 17% to $302.5 million, also a new record, as customers placed previously delayed orders. This was especially true for industrial clients as Covid-19 restrictions limited construction sites access last year. The largest businesses, such as flooring systems and corrosion control coatings, helped drive growth in the quarter.
Specialty Products Group also had a record quarter as revenue grew 10% to $193.6 million. Outdoor rection, furniture and OEM product lines were singled out as strong performers.
Takeaways
RPM International had record results in every segment but the Consumer Group, though results here trailed only the second quarter of fiscal year 2021.
Leadership noted several times that raw material, freight and wage costs were higher in nearly every business due to inflation. Raw material shortages were also blamed for a meaningful number of lost sales in Consumer Group.
Considering how well the Consumer Group acted last year, the limited supply of products and higher inflationary costs, it can be argued that the comparative sales decline should have been significantly steeper than what it was. Instead, results were almost a new record for the segment. The fact that sales fell just a low single-digit percentage speaks to the strength of the segment’s brands amongst both professional contractors and do-it-yourself customers.
The company has worked to adjust to these headwinds by raising prices in most categories that has more than made up for increased input costs. The good news is that price increases haven’t led to lower demand for products, given the record performance in most areas of the company. RPM International has also taken steps to address material scarcity by finding new sources, including a new manufacturing site in Texas. As a result, it is expected that lost sales due to material challenges will be recovered in the next few quarters.
Despite some persistent headwinds, guidance given by leadership is predicting that revenue will grow by double-digits for the third quarter of the fiscal year. This would be especially encouraging if achieved because last year’s results for the period notched a record.
Compared to fiscal year 2020, all four segments were higher. Construction Products and Specialty Products were up by at least 22% and Consumer improved 17%. This shows that RPM International’s performance in the most recent quarter wasn’t due to weaker results in the prior period.
Valuation analysis
With the overall strength of the company’s performance, it is not shocking that RPM International’s stock has acted so well since the last time I examined the company.
According to Wall Street analysts RPM International is expected to produce earnings per share of $3.61 for fiscal year 2022, which ends May 31. Looking out a bit further, analysts eye earnings per share of $4.49 as inflation costs are expected to subside somewhat by then. Using the current price of $90.95, RPM International trades at 25.2 times this year’s earnings estimates. For fiscal year 2023, the forward price-earnings ratio drops to 20.3.
According to Value Line, RPM International has a five-year average price-earnings ratio of close to 21 with the five-year average near 19. Using this year’s estimates, the stock can be considered overvalued. Using next year’s forecast, however, RPM International looks fairly valued.
RPM International is now slightly trading ahead of its intrinsic value, according to the GuruFocus Value chart.
With a GF Value of $82.82, RPM International has a price-to-GF-Value ratio of 1.10. GuruFocus rates the stock as fairly valued.
Final thoughts
RPM International turned in another excellent quarter, showing that demand for nearly all of the company’s products is higher compared to the past two second-quarter periods. Consumer Group faced a tough comparison as well as material shortages and yet still saw just a small decline from the record set in the prior year.
All segments are also outperforming their pre-pandemic results, with three of the four higher by a double-digit percentage.
The bounce back in RPM International's stock has occurred, though it did take place much faster than I anticipated. Shares have rallied close to 15% since my early October look at RPM International, but still trade at a fairly valued multiple using next fiscal year’s earnings per share estimates. The stock also isn’t too far off of its GF Value either.
Nothing that happened in the quarter changed has changed my thesis on the company. If anything, results reinforced the notion that RPM International is stronger today than it was before the pandemic begain. The strength of results and a reasonable forward valuation, not to mention the dividend growth streak of close to 50 years, suggest that RPM International could continue to be a solid investment. At the very least, investors interested in the name could wait for a pullback, since the stock no longer seems undervalued at current levels.
