Why RPM International Inc Should Outperform Its Peers in 2014

RPM International has margin expansion opportunities, particularly if commercial construction and U.S. industrial spending recover in 2014.

Apr 10, 2014 at 10:17AM

The paintings and coatings sector has notably outperformed the market in recent years, as companies such as PPG Industries (NYSE:PPG), Valspar (NYSE:VAL), and Sherwin-Williams (NYSE:SHW) have all delivered handsome returns to shareholders. RPM International (NYSE:RPM) has done the same, but it has notably underperformed the rest. However, its recent performance has been relatively and absolutely strong in recent months, and despite its hefty valuation, the stock is one of the most interesting industrial plays out there.

Peer group dynamics
As ever with investing, the important thing is to look at the future rather than the past, and this observation carries some weight when looking RPM International. Foolish investors already know about RPM International's growth prospects in 2014, and it's time to update investors on how it's executing. A share-price graph of the company relative to its peers reveals that it's starting to outperform.

SHW Chart

SHW data by YCharts

It's interesting to compare the four companies, because their performance and prospects could be indicative of a shift in growth prospects from housing-related construction toward commercial-based activity. It's not that housing is getting weaker, but rather that commercial construction looks likely to grow following a few fallow years. As for industrial coatings, the outlook remains mixed, but if economic growth remains on the track that history suggests, industrial investment will pick up.

For example, in the third-quarter conference call, RPM International's CEO, Frank Sullivan, discussed these themes when answering a question on end demand:

We don't see any signs that it's dipping down or going to go negative, and we have every expectation that that momentum in U.S. industrial spending and U.S. non-residential construction and infrastructure spending is going to build momentum.

Indeed, the market appears to be anticipating this shift, because Sherwin-Williams (which generated 70% of its sales from its paint stores and consumer group segments in 2013) has underperformed its peers this year. In addition, Valspar has seen strong growth in its paint division (up 10% in its most recent quarter), and even its coatings division (also up 10%) has seen strong growth thanks to its housing market-related wood product line. It's notable that Valspar has also underperformed RPM International and PPG Industries.  

With regard to PPG Industries, its strength is probably due to its specific exposure to the automotive and aerospace industries, the outperforming parts of the industrial sector.

Why RPM International?
The difference with RPM International is that any improvement in industrial markets and commercial construction in 2014 is likely to drop into significant margin improvements for the company. Even better, the company is already increasing its gross margins without a pick-up in these markets, thanks to a number of initiatives. For example, in its first nine months, gross margins increased by 90 basis points to 42.4%.

In fact, it raised full-year EPS guidance to a range of $2.10-$2.15 from a range of $2.05-$2.10, on the back of better-than-expected margin expansion in its industrial markets and "solid performance in Europe" (partly because of restructuring activities and a pick-up in European industrial markets), with U.S. construction markets also described as being "solid."

Margins and weather
The good news is that Foolish investors have reason to expect more of the same in the future, for two key reasons. RPM International generates its income from a mix of its industrial and consumer businesses.

Source: RPM International Presentations

First, according to management on the conference call, industrial margins are likely to improve:

We expect this steady improvement in sales growth and operating profit leverage in our industrial segment to continue in the coming quarter. ... [O]n the industrial side, I think you're going to continue to see some operating margin leverage, particularly as the volumes come back.

Meanwhile, the improvements in its consumer operating margins were described as "sustainable."

Second, its consumer business is expected to bounce back in future quarters following a tough third quarter, where sales declined 2.7% because of poor weather. RPM International generates 90% of its consumer sales from North America, and the weather took its toll on the segment.

The bottom line
All told, RPM International has good prospects for 2014. Analysts have the company on EPS growth of 17% and 2.6% for the years to May 2014 and 2015, respectively. On a P/E ratio of around 20 times 2014 earnings, the stock is hardly cheap. However, if you're convinced that U.S. industrial spending and commercial construction are likely to surprise on the upside, then RPM International can outperform thanks to its margin expansion potential.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Sherwin-Williams and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information