RPM International Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

RPM International is a global company specializing in specialty coatings, sealants, adhesives, and building materials, serving diverse industries with a focus on maintenance, repair and operations (MRO) solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

RPM’s business is centered around specialty chemical products, often not the most glamorous but essential for a variety of industries, primarily in areas related to construction and maintenance. They have a well-diversified business model, making their performance somewhat less volatile.

Business Overview

RPM International operates primarily through four business segments:

  1. Construction Products Group (CPG): This segment focuses on products for specialty construction. They provide concrete restoration, cement additives, roof coatings, waterproofing sealants, and other construction and maintenance materials. These products can be used for buildings, bridges and highways.
  2. Performance Coatings Group (PCG): This segment focuses on high-performance coatings for commercial and industrial applications. This segment provides products designed for demanding environments and often with highly-specialized needs.
  3. Consumer Segment: This segment caters to consumers with various specialty paints, and consumer-branded sealants and adhesives for the DIY and home improvement markets.
  4. Specialty Products Group (SPG): The products in the segment primarily comprise specialized ingredients for chemical, medical and pharmaceutical application and, among others, for construction products, flooring and roofing, performance additives, and specialty coatings for wood and metal.

These four segments have many differences, as their products are not used in similar industries.

Key Points to Understand Their Revenue Distribution: It can be challenging to identify the exact proportions, since RPM’s reporting is a mixture of geographic segments and business segments. Overall, North America is where the majority of revenue comes from, but there is a very good distribution between the major geographic regions and sectors.

The company’s strategy revolves around a mix of organic growth through the introduction of new products and geographical expansion, as well as inorganic growth through acquisitions. RPM aims to build economies of scale across its different businesses and, where possible, vertically integrate its supply chain.

Industry Trends

Several trends affect RPM’s industry, some are positive and some are a potential negative.

  • Infrastructure Spending: Increased government spending on infrastructure projects is a potential boon to the Construction Products Group.
  • Sustainability: Growing demand for greener materials could open up new markets, and this aligns well with the need for more eco-friendly coating, sealants and other solutions.
  • Global Manufacturing and Construction: The long-term growth trends in building construction and industrial activity in certain regions, primarily in Asia and Latin America, will support revenue growth.
  • Raw Material Costs: Fluctuations in raw material costs (especially petroleum products) can affect the company’s profit margins. This is especially relevant for the company’s coatings segments.
  • Skilled Labor Shortages: In the construction industry, shortages of skilled labor can make it difficult to complete projects on time and may result in higher costs.

Competitive Landscape

RPM operates in a competitive environment with numerous competitors. Here is a non-exhaustive list of their primary competitors:

  • Sherwin-Williams
  • PPG
  • Axalta
  • AkzoNobel
  • Sika
  • 3M
  • Dow
  • BASF

In several niches, they face competition from well-established, local brands.

RPM doesn’t have a great scale advantage compared with these large, global chemical companies. Most of the value that RPM provides is in the specialized characteristics and product application expertise, which often comes with a higher profit margin.

What Makes RPM Different?

RPM is one of the most diversified companies in the market. They have a huge variety of products and operate in many different niches. They are not a company with a single strong brand, but rather a collection of companies that often operate as a separate brand.

Financial Analysis

RPM is a company with a fiscal year that ends May 31st. When you see references to a given year, for example, 2024, you should assume it means June 1, 2023 to May 31, 2024.

RPM’s profitability has been relatively consistent over the last couple of years. Revenue has been trending upwards with the company being able to increase sales by a few percentage points each year. They have been able to somewhat improve the efficiency of the business, leading to margins slightly improving over time as well.

Revenues In fiscal 2024, RPM’s total net sales were $7.33 billion, compared with $6.77 billion in 2023, a growth of 8.3%. Here’s a breakdown by segment:

  • CPG: $2.81 Billion (38.3% of total net sales)
  • PCG: $2.33 Billion (31.8% of total net sales)
  • Consumer: $1.57 Billion (21.5% of total net sales)
  • SPG: $0.62 Billion (8.4% of total net sales) Revenues have grown both organically and by acquisitions.

Profitability Here’s an overview:

  • Gross profit margin: 40.8%
  • SG&A as a percentage of sales: 26.3%
  • EBIT: $1.05 Billion
  • Net income: $584 Million
  • Return on Equity (ROE): 21.3%.

Latest Financials The company’s most recent results for the fiscal first quarter of 2025 (ending August 31st) shows that the company continues to deliver on all of its segments, as revenue, margins and earnings have increased. The revenue growth was mostly organic. Also, the management expects that its restructuring plan will help the margins to increase over the next years.

Moat Assessment Based on the given documents:

  • Brand Recognition (Narrow Moat): Some of RPM’s brands have good recognition in specific niches, which enables them to command a premium price. However, the strength of the brands is not strong enough to be a dominant force.
  • Scale Advantage (Narrow Moat): RPM’s size and its multi-segment portfolio give it scale advantages, allowing it to offer a variety of specialized products and services, and also to negotiate better prices with suppliers. However, most of the segments operate in highly competitive industries.
  • Switching Costs (Narrow Moat): Some products, especially those that are specialized, offer high-switching costs.
  • Unique Assets (Narrow Moat): RPM’s access to certain ingredients or processes in their specialty businesses gives them a slight advantage over competitors, albeit with the limitation of being replicable.

Based on these characteristics, we would rate the moat at 3 / 5. There are some solid elements that can be very durable but no truly exceptional advantages that will last for many years.

The biggest risk to the moat of the company comes from other large competitors that can leverage their scale advantages to disrupt the company’s niches. The company’s lack of scale advantages in most industries also makes it more vulnerable to high inflation and rising input costs.

Risks Several risks could damage RPM’s business and moat:

  • Economic Cyclicality: The Construction Products and Performance Coatings segments are sensitive to the business cycle. Downturns in construction, manufacturing and other industries that depend on these product lines could reduce the company’s revenues and profitability.
  • Raw Material Cost Inflation: As a chemical business, RPM is exposed to the cost of raw materials, which are often derived from oil prices. Large fluctuations in costs can affect the company’s profitability if prices can not be increased to customers.
  • Technological Change: While they try to be ahead of technological advancement, it is very possible that the company may fall behind and miss important innovations in its field, which will have a negative impact on its moat.
  • Acquisition Risks: RPM’s acquisition strategy presents execution risk and the risk of overpaying for new acquisitions.
  • Competition: Competitive intensity can significantly reduce the pricing power and margins of the company, even in its niche businesses.

Business Resilience Despite the vulnerabilities listed above, there are also indications of business strength:

  • Diversification: RPM’s operations span across various geographies and sectors. This makes it a somewhat safer business than companies that focus only on certain niche markets.
  • Resilient Revenue: The need for MRO products tends to be more consistent than the need for new products, which makes a recession-proof business for RPM.
  • Decentralization: RPM’s decentralized operation model enables its businesses to be more agile, and allows them to react better to the ever changing conditions in its various niches.

Understandability We would rate the understandability of this business as a 2/5 because it requires knowledge of the many different businesses that the company operates and their respective economics, which is quite complex. Although the financial statements are quite easy to understand, the business complexity and the many subsidiaries make it difficult for the average investor.

Balance Sheet Health We would rate the balance sheet health of the company at 4/5.

  • Current Ratio: 1.75. A current ratio above one is a positive sign, but more information is needed to determine if it is good enough for the business.
  • Debt-to-Equity Ratio: 0.64, which is a healthy level of debt and presents only a reasonable risk.
  • Adequate Liquidity: RPM has a relatively good amount of cash on hand and has been showing good operating cash flow performance.

The level of debt appears to be manageable and the company’s liquidity position seems solid. Also, the company has been able to generate a lot of cash and its cash flow is stable and growing.