RD's Picks

RPM International's annual report for the year ending in May 2007 was recently released and I thought it was worth a review of the highlights. For those not familiar with the company, RPM is a holding company for a group of businesses producing paints, coatings, sealants, and adhesives for industrial and consumer markets.

Vitals as of Friday, Sep 21: Market cap of $2.9 billion; forward PE of 12.2, PEG of 1.15, 0.85 times sales and EV/EBITDA of 8.5 on the trailing twelve months. The quarterly dividend payout is 17.5 cents for a yield of 3.0%.

A company's history is important, but we care about the future. Frank C. Sullivan, RPM's CEO, outlines his outlook for the next three years in his opening letter. Among the highlights, "Preliminary indications suggest compounded annual growth in sales of 10 percent and earnings of 10 to 12 percent over [the next] three year period."

The company has a disciplined acquisition approach and typically does several deals a year. Over the 2007 fiscal year RPM completed six transactions for a total of $140 million. Mr. Sullivan tells us to expect more of the same going forward.

The quote I was happiest to see, "During this three year period, shareholders should expect continuing disciplined acquisition growth ... and a cash dividend that increases each year." (emphasis added)

One of the things I like about this company is that the 'international' in the name really means international. For FY 2007, total sales were $3.34 billion. Of that total, $998 million or nearly 30% came from outside the U.S. Foreign sales grew by 31% over 2006 compared to a little over 4% for U.S. sales growth. The company is growing operations in Europe, Central and South America, India and China.

There are some risks to investing in this company. Raw material prices are a concern in today's markets. The company has been able to raise prices to offset higher material costs, but there is no guarantee they will be able to continue to pass those costs along to customers.

Since RPM makes several products that are used in housing construction, the slump in homebuilding is a natural concern for the business. In a "Q&A with the CEO" piece, that question is addressed by Mr. Sullivan, "Less than 10 percent of our sales is seriously impacted by new housing starts..."

Another risk is asbestos liability. RPM is a defendant in a number of asbestos exposure cases related to products previously manufactured by RPM or its subsidiaries. The company is settling these cases and established a claims reserve in 2006 to cover the best estimate of their liabilities. RPM is also involved in litigation with some of their insurers. RPM believes the insurers improperly claimed coverage was exhausted and should have covered more of the asbestos claims. The reserve does not assume any repayments from the insurance litigation. To the extent settlements may exceed the claims reserve earnings would be impaired. If the company is successful in the litigation with the insurance companies, those settlements would reduce the need for reserves and provide a one-time increase to earnings.

I consider the stock a buy up to the mid 24 dollar range. Assigning a near market PE of 15 to the forward earnings gives it a 12-month price target of $29.

Disclosure: At the time of writing, I own stock in RPM International.

Comments: View Comments |  Saturday September 22, 2007