If we were to examine the best-performing stocks in history… certain commonalities would emerge. Consistent earnings growth, multiple-expansion, and going from hated to loved.

These types of opportunities are rare but often are found in turnaround situations. That is why today, I want to talk about RPM International (RPM) which is in the midst of its own impressive turnaround.

In 2019, RPM was facing a serious problem – the cost of its raw materials was rising, while at the same time sales were soft. Due to this, analysts were cutting earnings estimates, and the stock was a major underperformer. Although the company remained profitable, the underlying trend was not encouraging. In fact, many believed that its 45+ year streak of dividend increases would be a casualty of these struggles.

As a result, RPM initiated an aggressive restructuring with its 2020 MAP for Growth. Under this plan, RPM streamlined operations, eliminated redundancies, and shuttered older plants. All in all, it’s managed to cut $290 million in costs so far.

This has already started paying dividends as earnings estimates have been revised higher in recent months by 25% for 2021 and 18% for 2022. Additionally, in its last quarterly report, RPM increased free cash flow by $270 million, and net income increased by 30% despite sales growth of 6%.

Let’s dig deeper into RPM, and why the future is so bright for this comeback stock.

Growth Drivers

Due to its restructuring, RPM is emerging into the post-coronavirus economy as a leaner company that has pivoted to focusing on its most profitable products. This is the primary factor behind its recent share price performance and analyst upgrades.

The other factor is the improving macroeconomic environment. RPM’s business is tied to the industrial economy and housing market. Fortunately, both sectors are growing which bodes well for RPM’s intermediate-term results.

As you might suspect, a strong housing market leads to more construction and renovations which will strengthen demand for RPM’s construction and consumer products. Similar to the industrial sector, the fundamentals underpinning the housing market are solid. We have low housing inventory, rock-bottom mortgage rates, strong household balance sheets, and a demographic bulge of Millennials entering their peak-consumption years.

Following the restructuring, RPM was organized into four divisions – construction products, performance coatings, consumer products, and specialty products. Of these, consumer products grew at a healthy 21% clip, while the other divisions were mainly flat. However, the improving macro backdrop means that these other parts of the company should start seeing growth as well in coming quarters.

Value Story

Due to this successful turnaround and improving economic environment, RPM is set to increase EPS from $3 in 2020 to $5.2 in 2022 based on analysts’ forecasts. Another catalyst for the stock will be an increase in multiples.

Currently, RPM has a forward P/E ratio of 18.3. This is significantly lower than the forward P/E of the Specialty Chemicals group at 25.7. Historically, RPM’s multiples have been in-line with its peers, however, the stock has been punished due to its previous poor performance. 

In a sense, investors have put RPM in the “penalty box” because of past operational weakness. Multiples are likely to return to historical norms as its turnaround continues which would be another catalyst for the stock price. Another reason to expect multiple-expansion is that RPM’s cost-cutting is leading margins to increase. Typically, stocks with bigger margins are rewarded with higher multiples.

One indication that RPM is beginning to emerge from the “penalty box” is that Wall Street analysts are getting increasingly bullish on the stock. The average price target is $104 which implies a 20% upside from current price levels. However, some of the top analysts see $110 or even $113 as the more likely destination for shares in the year ahead. That gives investors plenty of reason to grab it up here under $90. 

POWR Ratings

The POWR Ratings are also high on RPM as it has an Overall Rating of A which translates to a Strong Buy. The POWR Ratings are calculated by taking into account 118 different factors with the weighting of each optimized to improve overall performance. In fact, the A rated stocks have produced an average annual return of +30.72% since 1999. RPM also has a Growth rating of A along with Value and Quality ratings of B. Note that the Quality rating is focused on the fundamental metrics of their operation. So clearly the restructuring effort has led to this higher grade.  

Also good to know that the Chemicals industry is ranked #14 out of 124 industries. And in this top rated group RPM is ranked #2 out of 94 chemical stocks. 

Conclusion

RPM is an intriguing mix. We have a company that is staging a successful turnaround that is already yielding positive results. The stock remains unloved by investors as indicated by its low multiples. 

Yet let’s remember that RPM is a legacy brand that has raised its dividend for 46 years. Its turnaround was less about survival and more about maintaining its standard of excellence which also reflects well on its management. Finally, RPM is going to benefit from a major, macro tailwind as the strong industrial economy and housing result in increased sales and pricing power. 

In concert, these factors should lead to earnings growth and multiple expansion for RPM. And that is why I have selected it as my Stock of the Week. 

Discover More Stocks Like RPM International

RPM is just one of 14 picks in my Reitmeister Total Return portfolio. That is where I put 40 years of investing experience to work for investors including:

• Market Outlook
• Timely Trading Strategy
• Portfolio of Hand-Selected Stocks and ETFs

Note that in January this portfolio generated a +7.86% return while the S&P ended in the red. And going back the past 3 months it has greatly outperformed with a +24.66% gain. 

If you would like to see the current portfolio of 14 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.  

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RPM shares were trading at $87.24 per share on Monday afternoon, up $0.78 (+0.90%). Year-to-date, RPM has declined -3.48%, versus a 4.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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