RPM International: Performing Well But Wait For The Right Time

RPM International (NYSE:RPM) manufactures specialty chemicals for consumer markets. RPM recently announced solid Q1 FY24 results. I will analyze its Q1 FY24 results in this report. The company has the ability to perform in adverse market conditions and looks promising. But the technical chart looks bearish. Hence, I assign a hold rating on RPM.

Financial Analysis

RPM recently posted its Q1 FY24 results. The net sales for Q1 FY24 were $2 billion, a rise of 4.1% compared to Q1 FY23. A solid performance in its construction products group [CPG] and performance coatings group [PCG] segments was the main reason behind the sales rise. The sales from the CPG segment grew by 10.8% in Q1 FY24 compared to Q1 FY23. The CPG segment benefitted from strength in roofing and facade restoration systems. The sales from the PCG segment grew by 4.1% in Q1 FY24 compared to Q1 FY23. Higher pricing and strong demand for flooring systems were the major reasons behind the sales growth in the PCG segment. Its gross margin for Q1 FY24 was 41.1%, which was 38.5% in Q1 FY23. The management attributed the improvement to its MAP 2025 operational improvement program.

The company achieved record EBIT and net income through better fixed cost utilization and operational improvement; the net income in Q1 FY24 grew by 18.9% compared to Q1 FY23. All the initiative that the management took, like the MAP 2025 program, which they launched last year, is proving beneficial, and the overall financial results have been superb as it ticks every box. They witnessed growth in every aspect, from sales margins to profitability. The results became more impressive because the company witnessed growth despite adverse market conditions. The construction market in North America and Europe has been struggling and experiencing a slowdown due to rising interest and mortgage rates. But despite all these headwinds, their construction products segment experienced growth, which is impressive. But even if they have performed well in adverse market conditions, there is no guarantee that they might continue to do so. We cannot ignore the fact that the market conditions, especially in the construction market, are not favorable. Additionally, the second and third quarters are generally the lowest in terms of revenue for the company historically. So, considering the adverse market, I think the growth in the second and third quarters might not be significant, and this might affect the company's share price.

Technical Analysis

RPM is trading at $96. I am analyzing this stock on a monthly time frame. In my opinion, the chart of RPM is the perfect definition of a stable and trustworthy stock. The RPM stock has grown stably over the years, and even at the times of stock market crashes like 2008 and 2020, this stock recovered quickly. But even if it's a stable stock, the timing of buying a stock matters a lot, and buying it right now would not be a wise decision. Because the stock has formed a double top pattern in a monthly time frame, which shows bearishness. So, there is a high chance that the stock might correct in the near term. The nearest support zone for the stock is at $79. So, I see the stock reaching $79 in the near future. Hence, considering the price action, I assign a hold rating on RPM.

Should One Invest In RPM?

First, take a look at RPM's valuation. RPM has a P/E [FWD] ratio of 19.28x, which is higher than the sector median of 14.07x, and has a Price / Sales [FWD] ratio of 1.64x compared to the sector median of 1.06x. Looking at the ratios, the company might seem overvalued, but even with these high multiples, I think RPM is undervalued because its growth justifies its high valuation. The company has recorded the seventh consecutive quarter of record revenue and achieved it in adverse market conditions, which is more impressive. So, the high valuation of the company is justified by the high growth. Additionally, its balance sheet has been improving. The CFO for Q1 FY24 was $359.2 million, which was a quarterly record. The company used the majority of its cash in debt payments and dividends. It used $193 million in debt payment and also increased cash dividend by 5.1% in Q1 FY24 compared to Q1 FY23. By the end of August 2023, cash and cash equivalents had increased to $240.5 million, up 21.7% and 11.4% from August 2022 and May 2023, respectively, and the long-term debt has also reduced slightly. With the cost-saving initiative by the company, its profitability has been improved, and with its cash-generating ability, I believe with time, the debt might continue to decrease because, in this quarter, the company showed that they are focused on reducing the debt because in this quarter they took almost no debt and dedicated most of the cash in debt reduction. But despite all these positive factors, I don't recommend buying it now because the technical chart is suggesting a correction in the near future, which I think is definitely a positive thing because every correction in the stock will be an amazing buying opportunity for the long term and the continued slowdown in the construction market might hamper its growth in the coming quarters. Hence, waiting for the correction and then adding the stock might maximize the gains. Hence, I assign a hold rating on RPM.

Risk

Excluding direct exports from the United States, which made for about 0.9% of their net sales for the fiscal year that ended on May 31, 2023, their overseas manufacturing operations accounted for about 28.5% of their net sales. They intend to keep expanding their international operations. However, the expansion and upkeep of these operations may be negatively impacted by shifts in the political, social, and economic landscape; inflation rates; trade protection measures; limitations on foreign investments and earnings repatriation; shifting rights related to intellectual property; challenges in staffing and overseeing international operations; and modifications to regulatory frameworks that limit their ability to sell their goods or raise their expenses. There could be serious risks associated with their capacity to manage their overseas activities, which could have a negative impact on their financial situation, cash flow, liquidity, and operating results.

Bottom Line

Its financial performance has been quite solid, and it has the ability to deliver even in adverse market conditions, and its balance sheet is improving. Every dip in the stock will be a buying opportunity because the company ticks every parameter that is required for investment purposes, like increasing sales with every quarter, improving margins, healthy cash position, and effective use of cash in the form of debt payment and returning money to its shareholders in the form of dividends. It is fundamentally and financially solid. But the technical chart suggests a correction in the near future. Their financial performance has been solid, and the company is looking fundamentally strong, but I assign a hold rating on RPM mainly because of the technical chart and continued slowdown in the construction market.