RPM International Thrives in Rate-Cut Driven Construction Rally

October 07, 2024 at 10:38 AM EDT

Paint tools collection isolated on white — Photo

RPM International Inc. (NYSE: RPM) is a global manufacturer of specialty chemicals, coating, sealants, and building materials used for industrial and construction applications. The name may not sound familiar since it’s the parent company of a portfolio of more than 85 brands for professionals and do-it-yourself-ers (DIY). Its product can be found at The Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) as well as Walmart Inc. (NYSE: WMT) and Target Inc. (NYSE: TGT). The construction sector giant has surged to all-time highs with more runway thanks to the start of a new interest rate cut cycle that is expected to stimulate construction activity.

RPM International’s Diverse Portfolio of Leading Brands

RPM's brands are familiar to construction industry professionals and DIY home renovation amateurs. The brands are categorized into four groups.

Construction Products Group (CPG) brand products are made for building construction, restoration, and maintenance. The products are sold to distributors, contractors, and end-users across 130 countries. It benefits from the data center construction boom. The CPG's revenues are tied to the commercial construction market, which has an 8.5% compound annual growth rate (CAGR) until 2033. The interest rate cut cycle is expected to stimulate construction activity. Some of its brands include Tremco, Dryvit, Nudara, Vandex, and Euclid Chemical. This segment generates the most revenue at 37% of net sales.
Specialty Products Group (SPG) brand products accommodate a variety of commercial, industrial, and niche applications, mainly in the United States but starting to expand in Europe. Its products are sold to distributors and contractors. This SPG should gradually improve with interest rate cuts. These brands include DayGlo, Radiant, Legend Brands, Kopcoat, Drieaz, and Valvtect. This segment generates 10% of net sales.
Performance Coating Group (PCG) group products protect, decorate, and extend the life of concrete and steel in the infrastructure and industrial segment. Brands include Stonhard, Kemtile, Logiball, Plastite, Prime Resins, Dudick, and Logiball. The PCG is mostly driven by the restoration and maintenance market, which generates 20% of net sales.
Consumer Group brands cater to professional contractors and home DIYers for home improvement and maintenance. These brands can be found in hardware, paint, home improvement stores, mass merchants, and craft shops. These include Rust-Oleum, Dynaflex, Kwik Seal, Roto-Rooter, Wolman, Touch ‘n Seal and Zinsser. The Consumer Group has felt the effects of weak Home Depot sales as they reported a 3% YoY decline in same-store sales. Home Depot is a key distributor of RPM International's goods. This segment generates 33% of net sales.

Interest Rate Cut Cycle Springs RPM Back to Life Despite Flat Earnings

RPM International reported its fiscal Q1 2025 EPS of $1.84, which beat consensus estimates by 9 cents. Revenues fell 2.1% YoY to $1.97 billion, missing the consensus analyst estimate of $2.01 billion. Under the hood reveals improving efficiencies as the company generated an 11^th consecutive quarter of record earnings before interest and taxes (EBIT). EBIT was $303.9 million, and adjusted EBIT was $328.3 million, up 6% YoY. The CPG and PCG generated organic growth, while SPG and Consumer groups expanded adjusted EBIT margins despite weakness in the housing markets.

The company generated a strong cash flow of $248.1 million from operating activities. The stock gapped to new all-time highs regardless in anticipation of a recovery in the construction cycle from interest rate cuts.

RPM International Issues Mixed Guidance

The company issued downside fiscal second quarter of 2025 revenues of $1.79 billion versus $1.82 billion consensus estimates. Consolidated adjusted EBIT is expected to grow in the mid-single digit range YoY.

Revenues for the fiscal full year 2025 are expected to be around $7.47 billion. Consolidated EBIT is expected to rise in the mid-single to low double-digit percentage range YoY.

Repairing Damage from Hurricane Helene

RPM International CEO Frank Sullivan offered his sympathies to North Carolina residents and everyone affected by Hurricane Helene. Sullivan underscored that its businesses, including Legend Brands and Tremco, are supplying disaster restoration equipment, tarps, generators, and products, enabling businesses and people to save and restore homes and roofs with water damage.

Sullivan also noted how disciplined the company has been in the backdrop of an uncertain economic climate, “The last comment I'll make is across every segment of RPM, we have been very deliberate in focused SG&A spends on new product areas and growth areas, as Rusty commented. We are moving our sales forces to the few pockets where growth exists. But in each of our segments in Q1, our dollar spent in SG&A was below last year, so we are taking a pretty targeted and disciplined approach to SG&A, and you'll see that continue in Q2.”

RPM Stock Triggers a Bull Flag Breakout

A bull flag breakout forms when the stock surges up through its descending upper trendline resistance. The flag formation precedes the bull flag, which forms after the steep run-up flagpole peaks. The flag is formed as the stock pulls back in a descending parallel channel.

RPM International stock chart

RPM peaked its flagpole run up at $125.35 on Sept. 19, 2024, as the flag formed on parallel descending (falling) upper and lower trendlines. The pullback found support at the daily anchored VWAP at $120.27 heading into its fiscal Q1 2025 earnings report. While the report wasn't exactly a blowout, it demonstrated the company's efficiency, as evidenced by its record EBIT. The hopes for a resurgence in the construction sector prompted a price gap, triggering the bull flag breakout at the $1229.96 upper gap fill. Shares continued to grind higher, testing its consensus price target at $129.70. The daily relative strength index (RSI) is still rising at the 66-band. Fibonacci (Fib) pullback support levels are at $128.18, $123.22, $119.72, and $113.16.

RPM International’s average consensus price target is $129.70, and its highest analyst price target is $149.00. Six analysts have Buy ratings, and four have Hold ratings. The stock trades at 23.4x forward earnings.

Actionable Options Strategies: While RPM is making new all-time highs, the recovery of the construction sector could provide much more runway. Bullish investors can use pullbacks to enter stock using cash-secured puts at the fib pullback support and write covered calls to execute a wheel strategy for income in addition to the 1.43% annual dividend yield.

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