Sunday, July 22, 2012

RPM International Stock Analysis

As mentioned in my previous post, I'm going to try and have 1 stock analysis report for some popular dividend growth stocks come out prior to their latest earnings release this week. Today we'll look at RPM International (RPM). RPM International closed on Friday 7/20/12 at $27.24.

Company Background:

RPM International Inc., together with its subsidiaries, manufactures, markets, and sells various specialty chemical products to industrial and consumer markets worldwide. The company’s Industrial segment offers waterproofing and institutional roofing systems used in building protection, maintenance, and weatherproofing applications; sealants, tapes, and foams; residential basement waterproofing systems; specialized roofing and building maintenance and related services; specialty industrial adhesives and sealants; and concrete and masonry additives, and related construction chemicals. It also offers polymer flooring systems, and offshore and marine structures; industrial and commercial tile systems; fiberglass reinforced plastic gratings and shapes; heavy-duty corrosion-control coatings, fireproofing products, and containment linings; specialty construction products, including bridge expansion joints, bridge deck and parking deck membranes, curb and channel drains, highway markings, protective coatings, and concrete repairs; and fluorescent colorants and pigments, waterproofing and flooring products, exterior insulating finishing systems, and shellac-based-specialty coatings for industrial and pharmaceutical uses, edible glazes, and food coatings. The company’s Consumer segment provides professional use and do-it-yourself products for a range of consumer applications, including home improvement and personal leisure activities. Its products include coating products; specialty products; deck and fence restoration products; metallic and faux finish coatings; hobby paints and cements; and caulks, sealants, adhesives, insulating foam, spackling, glazing, and other general patch and repair products. The company offers its products under the Carboline, DAP, EUCO, Fibergrate, Flecto, Flowcrete, Hummervoll, Universal Sealants, illbruck, Rust-Oleum, Stonhard, Tremco, Watco, and Zinsser brand names.

DCF Valuation:

Analysts expect RPM to grow earnings 9.20% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $31.91. This means that at $27.24 the shares are undervalued by 14.64%.



Graham Number:

Over the last 12 months, RPM's EPS were $1.56 and it's current book value per share is $9.9.65. The Graham Number is calculated to be $18.40 which means that at $27.24 the shares are overvalued by 48%.

Average High Dividend Yield:

RPM's average high dividend yield for the past 5 years is 5.70% and for the past 10 years is 4.94%. This gives target prices of $15.09 and $17.21 respectively based on the current annual dividend of $0.86. These are overvalued by 80.5% and 56.4%, respectively.


Average Low PE Ratio:

RPM's average low PE ratio for the past 5 years is 17.85 and for the past 10 years is 13.21. This would correspond to a price per share of $28.92 and $21.39 respectively based off the analyst estimate of $1.62 per share for the fiscal year ending in May 2012. The 5 year and 10 year low PE price targets are undervalued by 5.8% and overvalued by 27.3%, respectively.

Average Low P/S Ratio:

RPM's average low PS ratio for the past 5 years is 0.55 and for the past 10 years is 0.59. This would correspond to a price per share of $15.84 and $16.97 respectively based off the analyst estimate for revenue growth from 2011 to 2012. The 5 year and 10 year low PS price targets are overvalued by 72.0% and 60.5%, respectively.

Dividend Discount Model:

For the DDM I assumed that RPM will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 2.38%. After that I assumed RPM can continue to raise dividends by 2.00% annually and used a discount rate of 8%. Based on this RPM is worth $14.01 meaning it's overvalued at $27.24 by 94.4%

PE Ratios:

RPM's trailing PE is 17.46 and it's forward PE is 15.05. The PE3 based on the average earnings for the last 3 years is 21.68. Compared to it's industry, RPM seems to be undervalued versus PPG (19.71) and SHW (26.48) but overvalued versus the industry as a whole (13.01). All industry and competitor comparisons are on a TTM EPS basis.

Fundamentals:

RPM's gross margin for FY 2009/10 and FY 2010/11 was 42.06% and 41.42% respectively. Their gross margin is pretty solid at 40%+ and has averaged 45.55% since 2001. Their net income margin for the same years were 5.28% and 5.59% respectively. I like the net income margin to be at least 10% and preferably rising. Unfortunately, RPM's net income margin is around half of what I prefer to see and has only reached a high of 6.24% which is still a long ways off from the 10% threshold. The cash-to-debt ratio for the same years were 0.23 and 0.39. I am worried about their cash-to-debt ratio but it is at least moving in the right direction.

Share Buyback:

RPM's shares outstanding have been on a steady increase since 2001. Without looking further into the reason it would appear they are selling off company held shares to receive more funds or issuing a large amount as options for employees. Either way a stable share count is okay, but a rising share count is not good.


A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased. As you can see, RPM hasn't bought back shares in one year since 2001.

Dividend Analysis:

RPM is a dividend champion with 38 consecutive years of dividend increases. Their annual increase for the last 1, 3, 5 and 10 years has been 2.38%, 2.87%, 4.50% and 5.57%. Their payout ratio is still safe for now but at 58% for FY 2011 it's troublesome. They have passed a 100% payout ratio 3 times since 2001. The average payout ratio since 2001 is 85.55% and has ranged from a low of 42.07% to a high of 192.31%, plus a in 2006 the company took a loss meaning they couldn't cover their dividend at all from earnings.


Their FCF is troubling as well. FCF per share has been positive only 4 years since 2001, and the years they have been positive it hasn't been enough to cover dividends.


Return on Equity and Return on Capital Invested:

RPM's ROE and ROCI appear to be in at a low point in their cycle. It's okay given the nature of their business being a bit cyclical. Their lows so far have still been higher than the previous lows in the first few years of the 2000's.


Revenue and Net Income:

Since the basis of dividend growth is revenue and net income growth I've added a new section to my stock analysis. Here you can see RPM's history of revenue and net income since 2001. Their revenue growth is cyclical in nature and shows some possible signs of life. If things repeat as they did in the early 2000's now could be the chance to get into RPM after a few years of stagnant to slightly negative revenue growth.


Average Price and EPS:


RPM's average share price has been following the growth in EPS over the last few years, meaning it hasn't had much PE expansion or shrinkage.

Forecast:


The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years, 10 years or 16 whichever is least. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target PE is 9.91 which in my opinion is probably about right for a company that is currently having some pretty major issues. This corresponds to a entry price of $16.05, meaning that RPM is currently trading at a $11.19 premium to the forecast entry price.

Conclusion:

The average of all the valuation models gives a fair value of $20.02 which means that RPM International is currently trading at a 36.1% premium to the average fair value.

Given the nature of the economy at this point in time I don't think RPM International is that great of an investment. They are currently overvalued against almost all standard valuation metrics. As a pure dividend play while they get things going again you get a decent 3.16% current yield but their dividend growth has been very low for much of the last decade. Their highest YoY growth was only 9.52%.

Unless you can get a 4.00% yield, $21.50 entry price, I think I would stay away for now. As $21.50 they would still be overvalued by 7.40%. While their dividend growth has been fairly low and things in general don't look that great at the company right now, they have been increasing dividends for 38 years. It could be a decent speculative play on the industrial market as a whole which has been beaten up lately. Once the economy rights itself it'll be too late to get in, but for now I would be passing on RPM International at the current prices. I would need to be rewarded much more than their current 3.16% yield to hold the shares.

At a 3.50% target yield you would need to buy at the $25.71 mark and for a 4.00% yield the purchase price would need to be $22.50. If Intel stays at current levels when I am able to purchase next month I'll be adding to my current position. And a further drop in tech or the markets as a whole could bring about the 4.00% yield level.

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