RPM International Stock Appears To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of RPM International (NYSE:RPM, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $92.43 per share and the market cap of $12 billion, RPM International stock shows every sign of being modestly overvalued. GF Value for RPM International is shown in the chart below.


RPM International Stock Appears To Be Modestly Overvalued
RPM International Stock Appears To Be Modestly Overvalued

Because RPM International is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.9% over the past three years and is estimated to grow 4.33% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. RPM International has a cash-to-debt ratio of 0.11, which ranks worse than 89% of the companies in Chemicals industry. Based on this, GuruFocus ranks RPM International's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of RPM International over the past years:

RPM International Stock Appears To Be Modestly Overvalued
RPM International Stock Appears To Be Modestly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. RPM International has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.7 billion and earnings of $3.3 a share. Its operating margin is 12.02%, which ranks better than 68% of the companies in Chemicals industry. Overall, GuruFocus ranks the profitability of RPM International at 7 out of 10, which indicates fair profitability. This is the revenue and net income of RPM International over the past years:

RPM International Stock Appears To Be Modestly Overvalued
RPM International Stock Appears To Be Modestly Overvalued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. RPM International's 3-year average revenue growth rate is in the middle range of the companies in Chemicals industry. RPM International's 3-year average EBITDA growth rate is 14.8%, which ranks better than 72% of the companies in Chemicals industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, RPM International's return on invested capital is 11.27, and its cost of capital is 6.46. The historical ROIC vs WACC comparison of RPM International is shown below:

RPM International Stock Appears To Be Modestly Overvalued
RPM International Stock Appears To Be Modestly Overvalued

In closing, RPM International (NYSE:RPM, 30-year Financials) stock gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 72% of the companies in Chemicals industry. To learn more about RPM International stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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