When it comes to investing in the financial markets, it’s crucial to identify hidden gems that offer potential for both revenue growth and margin leverage. One such opportunity that often flies under the radar is RPM International (NYSE: RPM), a company that has been making steady progress in recent years. Investors who have capitalized on the dips in RPM’s stock price have been rewarded with solid 20% gains.
In comparison to its competitors in the industrial and coating sectors, such as Axalta (AXTA), PPG (PPG), Sherwin Williams (SHW), and Sika (OTCPK:SXYAY), RPM has outperformed the broader market. Despite having a more moderate track record of free cash flow (FCF) growth and capital return to shareholders, RPM continues to enjoy a premium valuation from investors.
However, the true appeal of RPM lies in its steady growth prospects and the opportunities for cost and margin leverage. With a diverse end-market mix, RPM is positioned to benefit from various sectors, including infrastructure and industrial reshoring. While the residential construction sector may experience a temporary slowdown, other areas like non-residential new-build and niche demand from industrial end-markets offer substantial growth potential for RPM.
The market environment also favors RPM’s cost structure, with lower input costs expected in the coming years. The company’s ongoing restructuring efforts, particularly in procurement and manufacturing optimization, offer additional avenues for margin expansion. Moreover, RPM’s commitment to integration and cross-selling opportunities among its acquired units further strengthens its competitive advantage.
Looking ahead, RPM’s outlook remains promising. Revenue growth is projected to be around 4-5% over the next three years, with long-term annualized revenue growth of approximately 4%. Margin improvement is anticipated to lead to a 250 basis point increase in EBITDA margin over the same period. By focusing on driving free cash flow margins into the low-double-digits by FY’28/29, RPM aims to achieve mid-teens FCF growth.
In terms of valuation, a discounted cash flow and margin/return-driven multiples-based approach suggests near-term fair value for RPM’s stock in the range of $100 to $106. While the shares may not be considered dirt-cheap, the company’s solid revenue outlook and potential for additional margin upside make it worthy of consideration for investors.
In summary, RPM International represents an attractive investment opportunity that offers both revenue growth and margin leverage. With its strong market position, diverse end-market mix, and ongoing restructuring efforts, RPM has the potential to unlock significant value for investors.
