Why You Should Put Your Money on This Stock

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What do you do if a stock gains more than 2% on a day the company announces they've earned less than half the profits it had earned the previous year? Two things – either you support the market or you raise your voice against it. My vote goes for the first for RPM International (NYSE: RPM), because I know there’s nothing more than one-time charges behind the hole in profits and that the paint and coatings maker’s first-quarter numbers have given me enough reasons to maintain my bullish stance on it.

Support that matters

Surprisingly, RPM’s consumer business, which is highly susceptible to the vagaries of consumer spending, outperformed its industrial division in the last quarter with an 8% jump in sales. What impressed me was that 6% of it came from organic growth that doesn’t take into account the impact of acquisitions.

Also, it’s good to see higher volumes driving revenue. You see, pricing is never really an issue for paints and coatings companies as they can pretty comfortably pass on higher costs to consumers. The year 2011 was a remarkable example. Prices of key raw material titanium dioxide shot through the roof as leading producers increased the pigment prices at regular intervals. Yet, paint makers managed to prevent their top lines from sliding off the cliff thanks to the strategy of passing-the-buck. If RPM ended its last financial year with a 12% improvement in sales, peers Sherwin-Williams (NYSE: SHW) and PPG Industries (NYSE: PPG) ended theirs with impressive 13% and 11% increase in sales, respectively, most coming on the back of high selling prices. Valspar (NYSE: VAL) did even better with 22.5% jump in 2011 sales. Obviously, an uptick in demand was crucial to help these companies keep their revenue afloat.

Bigger, the better

But RPM seemed to be better off than the others as it had accretive sales from recent acquisitions to fall back on in addition to higher prices. RPM is a classic example of how to grow business while pleasing shareholders. The company spent two-and-a-half times more during the first quarter than it did last year, and I must say, the money's being put to good use.

Continuing with its acquisition spree, RPM lapped up three companies in the four months ending August, stirring up a smart mix that included adding new products to its portfolio (personal care offerings) as well as deepening foothold in the rapidly-growing market, Brazil. The latter could prove to be RPM’s trump card in the years to come; so high is the region’s potential that peer Sherwin has an entire segment reportable under the name of ‘Latin America Coatings Group’ which accounted for roughly 10% of its total 2011 sales. Valspar, which derived 5% sales from Latin America in 2011, bought a Brazilian powder-coatings manufacturer last year in a bid to gain traction in the region.

Building on strong foundations

Most of RPM’s recent growth moves also point to one thing – that it is increasingly shifting focus to its industrial business, which is also its largest. First-quarter sales for this segment grew around 5% from the year-ago period, with 8% coming from acquisitions alone (which was unfortunately offset by losses on foreign exchange).

This strategic shift gets my green thumbs up as I have more faith on the sustainability of a revival in industrial segment areas such as commercial construction than on those riding the back of consumer sentiments. This also puts RPM in better stead than peer Sherwin-Williams as three of Sherwin’s four divisions deal primarily in consumer products which isn’t great news when housing is still largely in the dumps and consumer spending lukewarm. Comparatively, PPG’s products have wider industrial applications including in automotive and aerospace areas, but the company isn’t growing as fast as RPM in terms of markets or products.

Any uptick in commercial construction activity, in particular, is vital for RPM’s bottom line as it is responsible for nearly a third of its industrial segment sales. The company should only do better as the North American markets continue to gather steam, as evidenced by recent positive housing data and stellar numbers from homebuilders. Housing prices have now risen for six straight months, and the largest homebuilder in the U.S., D.R. Horton (NYSE: DHI), posted 20% higher orders and 19% climb in homebuilding revenue for the first nine months ended June 2012. Its last quarter’s pretax income was the highest since 2007.

Double treat for you!

If handsome dividends weren’t exciting enough, RPM has now given investors another reason to put its stock on their radar by upping the lower range of its full-year sales guidance considerably. Far more significant is management’s earnings outlook – it is now expecting earnings per share to jump by 9% to 12% from the last financial year which is way above its previous guidance of 5% to 10% rise.

If RPM can meet it, it will stand tall on the list of those who are looking for investments that balance both value and growth. I see no reason why this stock shouldn’t be a part of your watchlist. Click here to add it.

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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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