RPM International Inc. (RPM)

Executive Summary / Key Takeaways

• MAP 2025 transformation complete: RPM delivered 260 basis points of adjusted EBIT margin expansion and 320 basis points of working capital improvement since fiscal 2022, creating a leaner, more efficient operating platform that generated record adjusted EBIT margins in fiscal 2025.
• Pivot to Growth underway: While competitors cut costs in a no-growth environment, RPM is deliberately investing $47 million in incremental SG&A to expand sales forces, increase marketing, and rebuild its M&A pipeline, positioning the company to capture market share when demand recovers.
• Segment realignment drives synergies: The new three-segment structure (CPG, PCG, Consumer) effective June 2025 consolidates 75 ERP instances to 14 and repositions businesses to accelerate cross-selling and product development, with early signs of collaboration already boosting PCG's European growth.
• Acquisition momentum accelerates: The Pink Stuff and Ready Seal acquisitions expand RPM into grocery, dollar store, and e-commerce channels while building a global cleaning products platform, contributing 9.1% growth to the Consumer segment despite DIY market softness.
• Margin pressure is temporary but real: Q1 FY26 showed 50-70 basis points of EBIT margin contraction across all segments due to growth investments, material inflation, and temporary manufacturing inefficiencies from plant consolidations, but underlying MAP benefits remain intact and should re-emerge as volumes normalize.

Setting the Scene: The Specialty Chemicals Consolidator

RPM International, incorporated in 1947, has evolved from a modest adhesives manufacturer into a $7.4 billion specialty chemicals conglomerate that thrives by solving niche problems that larger competitors ignore. The company operates through three segments as of June 2025: Construction Products Group (CPG) providing sealants and roofing systems, Performance Coatings Group (PCG) delivering industrial flooring and corrosion control, and Consumer Group selling familiar brands like Rust-Oleum and DAP through retail channels. This structure reflects a deliberate shift from a decentralized federation of 75 separate ERP systems to an integrated platform designed for cross-segment collaboration and efficiency.

The specialty chemicals industry remains stubbornly fragmented, with global leaders like Sherwin-Williams (SHW) and PPG Industries (PPG) dominating architectural coatings while leaving countless niche applications to smaller players. RPM occupies the white space between these giants and pure-commodity producers, focusing on high-performance solutions for repair, maintenance, and specialized construction. This positioning insulates RPM from the worst of new construction cyclicality while exposing it to the more stable, higher-margin world of building envelope systems and infrastructure refurbishment. The company's decentralized, entrepreneurial culture allows individual brands to maintain customer intimacy that centralized behemoths cannot replicate, creating a portfolio of category leaders that collectively generate 24.16% return on equity—well above PPG's 16.16% and Axalta's (AXTA) 21.33%.

Industry dynamics currently favor RPM's model. Labor shortages in construction make the company's turnkey roofing and flooring solutions—where RPM both supplies and applies products—particularly valuable, as contractors struggle to find skilled workers. Data center construction booms drive double-digit growth in PCG's fiberglass reinforced plastics, while infrastructure spending and reshoring initiatives create demand for corrosion control systems. Conversely, DIY markets face 40-year lows in housing turnover, pressuring the Consumer segment's organic growth. These cross-currents explain why RPM's strategy emphasizes market share gains and new product introductions over broad market exposure.

Technology, Products, and Strategic Differentiation

RPM's competitive moat rests on proprietary formulations and system-selling approaches that deliver measurable performance advantages in harsh environments. The company's epoxy resins and intumescent coatings provide materially longer service life in infrastructure applications than standard offerings from PPG or Axalta, enabling premium pricing that supports gross margins of 41.33%. This technological edge manifests in products like UCO Tilt WB, a patent-pending bond breaker that accelerates roofing restoration cycles, and low-odor water-based spray paints that command new shelf space at major retailers.

The acquisition strategy directly enhances this differentiation. The Pink Stuff, a global household cleaning brand acquired in May 2025, opens grocery and dollar store channels that RPM previously couldn't access, while Ready Seal strengthens the wood stain category with a leader in exterior applications. These deals transform RPM from a paint-and-caulk supplier into a comprehensive cleaning and maintenance platform, allowing cross-merchandising opportunities and shared logistics that smaller competitors cannot match. The company is reorganizing internally to focus on the cleaning category, which now represents a $12-15 billion addressable market in the U.S. alone.

R&D investment remains disciplined but targeted, focusing on formulations that meet increasingly stringent environmental regulations while improving application efficiency. The company's Innovation Center of Excellence supports new product development across segments, enabling PCG's Industrial Coatings Group to win its first-ever project with John Deere (DE) by adding capabilities to compete for larger accounts. This upstream expansion, traditionally the domain of PPG and Axalta, demonstrates how MAP 2025's efficiency gains free up capital for capability investments that broaden RPM's addressable market.

Financial Performance & Segment Dynamics: Growth Investments Pressuring Near-Term Margins

RPM's Q1 FY26 results reveal the tension between harvesting MAP 2025 benefits and funding growth investments. Consolidated sales grew 7.4% to $2.11 billion, with all three segments posting record quarterly revenue despite mixed macro conditions. This top-line strength, however, came at the cost of profitability: gross margin contracted 20 basis points to 41.33% due to material inflation, unfavorable mix, and temporary inefficiencies from consolidating six manufacturing facilities. SG&A expense surged $47.4 million to 27.1% of sales, reflecting $18.6 million from acquisitions, merit increases, and an unexpected $8.8 million jump in healthcare costs—one-third attributed to weight loss drug expenses that management considers more permanent.

The segment-level performance tells a more nuanced story. CPG delivered 5.4% organic growth to $881.4 million, driven by turnkey roofing solutions for high-performance buildings, yet adjusted EBIT margin compressed 60 basis points to 18.5%. This contraction stems from temporary duplicative costs as manufacturing transfers from Toronto to three North American sites and from deliberate SG&A investments to expand Tremco's sales force. The 4% unit volume growth despite negative construction market dynamics demonstrates that these investments are capturing share, but the margin sacrifice is real and will persist until volumes absorb fixed costs.

PCG achieved 6.7% organic growth to $538.5 million, with strong demand for flooring solutions and data center-related fiberglass products pushing adjusted EBIT up 7.3%. Margin compression of 50 basis points to 15.2% reflects acquisition-related SG&A and unfavorable mix as the Stonehard flooring business aggressively hires salespeople to capitalize on labor-constrained markets. The segment's ability to grow in Europe through improved MAP 2025 collaboration shows the realignment is working, but the margin profile remains pressured by growth investments.

Consumer Group presents the most complex picture. Acquisitions contributed 9.1% growth, masking a 2.9% organic decline due to persistent DIY softness and product rationalization. Adjusted EBIT margin fell 70 basis points to 15.7% despite accretive margins from Pink Stuff and Ready Seal, as cost inflation, reduced fixed-cost utilization from lower volumes, and increased marketing expenses offset MAP 2025 benefits. The segment's performance shows RPM can outgrow a declining market through M&A and new products like low-odor spray paint, but the underlying DIY market remains challenged by 40-year lows in housing turnover.

Cash flow generation remains robust, with operating cash flow of $237.5 million and free cash flow of $175.0 million in Q1 FY26. The company deployed $182.4 million in investing activities, primarily for acquisitions, while maintaining a healthy net leverage ratio of 1.87x and $933 million in total liquidity. This financial flexibility supports the pivot to growth strategy, though the $44.3 million increase in cash used by accounts payable suggests working capital efficiencies from MAP 2025 may be peaking.

Outlook, Management Guidance, and Execution Risk

Management's guidance for fiscal 2026 reflects cautious optimism tempered by macro uncertainty. Sales are expected to reach the high end of the low to mid-single-digit growth range, driven by acquisition contributions and market share gains, while adjusted EBIT growth is projected toward the lower end of the high single-digit to low double-digit range. This divergence signals that growth investments will continue to pressure margins in the near term, with management prioritizing market position over immediate profit leverage.

The Q2 FY26 outlook calls for mid-single-digit growth in both consolidated sales and adjusted EBIT, with the Consumer segment expected to outpace CPG and PCG due to acquisition benefits. This implies that organic growth remains challenged, particularly in DIY markets where housing turnover shows no signs of recovery. Material inflation is projected to accelerate to 2-3% in Q2, disproportionately impacting Consumer, while tariff-related costs of $90-95 million will be partially offset through pricing actions and supply chain adjustments.

Execution risk centers on three areas. First, the six ongoing plant consolidations will continue creating temporary inefficiencies and duplicative costs through at least the first half of fiscal 2026. Second, the $8.8 million quarterly increase in healthcare costs, driven partly by weight loss drug expenses, represents a structural headwind that may persist. Third, the success of growth investments depends on achieving volume absorption to offset fixed-cost growth, which remains uncertain given macro headwinds in Canada and potential automotive sector slowdowns.

Management's strategy of expanding sales forces while competitors retrench creates a timing risk. If the anticipated market recovery materializes in late fiscal 2026 or fiscal 2027, RPM will be well-positioned to capture disproportionate share. However, if the current environment persists longer, the company may face pressure to moderate investments to protect margins. The company's history of overcooking expense cuts after the 2001 recession informs this approach—management wants to avoid being caught flat-footed when demand returns.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to RPM's pivot-to-growth strategy is a prolonged downturn in end markets that prevents volume absorption of fixed-cost investments. The Consumer segment faces a structural challenge with DIY demand at 40-year lows due to depressed housing turnover, and there is no clear catalyst for recovery while interest rates remain elevated. If this persists beyond fiscal 2026, the segment may be forced into more aggressive product rationalization that could further pressure organic growth.

Tariff uncertainty represents a quantifiable headwind, with management estimating $90-95 million in unmitigated impact. While half has been offset through production shifts and pricing, the remaining exposure—particularly in metal packaging where domestic steel producers have raised prices in line with tariff regimes—will continue pressuring Consumer segment margins. This disproportionately affects the highest-margin segment and could limit pricing power if competitors with different cost structures choose not to follow price increases.

Legal contingencies add downside risk. The EPA's $1.4 million proposed civil penalty for Toxic Substances Control Act violations, while manageable in size, signals regulatory scrutiny that could increase compliance costs. More concerning is the $110.8 million judgment (plus $2.3 million in legal fees) against a Consumer subsidiary, which RPM is appealing. The company's estimated range of outcomes between $0.5 million and $152.3 million creates uncertainty that could impact cash deployment for growth investments.

On the positive side, RPM's acquisition pipeline appears robust, with management noting that M&A valuations have fallen 2-3 multiple turns from peaks two to three years ago. This creates potential for accretive deals that could accelerate growth and drive multiple expansion if the company can successfully integrate targets while maintaining its decentralized culture. The $174.8 million remaining on the share repurchase authorization provides additional flexibility to create value if the stock becomes oversold on near-term margin concerns.

Valuation Context: Reasonable Multiple for a Transformed Business

At $105.92 per share, RPM trades at 19.8x trailing earnings and 14.45x EV/EBITDA, a valuation that appears reasonable relative to both its historical transformation and peer group. Sherwin-Williams commands 33.16x P/E and 22.74x EV/EBITDA, reflecting its consumer brand dominance but also its exposure to housing cyclicality. PPG trades at 18.13x P/E and 10.95x EV/EBITDA, with lower growth and margins. RPM's 24.16% ROE exceeds PPG's 16.16% and approaches Axalta's 21.33%, while its 1.87x net leverage provides more flexibility than Sherwin-Williams' 3.25x debt-to-equity ratio.

Cash flow metrics tell a more complete story. The company's 17.94x price-to-operating-cash-flow and 26.34x price-to-free-cash-flow multiples reflect the near-term margin pressure from growth investments. However, with $768 million in annual operating cash flow and $538 million in free cash flow, RPM generates sufficient capital to fund its $220-240 million capex guidance, maintain its 2.05% dividend yield (38.13% payout ratio), and pursue acquisitions without straining the balance sheet. The 1.81x price-to-sales ratio sits between PPG's 1.62x and Sherwin-Williams' 3.63x, appropriately reflecting RPM's specialty niche positioning versus pure-play coatings leaders.

What matters for valuation is whether the market is properly discounting the duration of margin pressure versus the durability of MAP 2025's structural improvements. The 20 basis point gross margin decline in Q1 FY26, while concerning, must be weighed against the 260 basis points of improvement achieved over the MAP 2025 period. If management's guidance proves conservative and volume absorption accelerates in the second half of fiscal 2026, the current multiple could prove attractive for investors willing to endure near-term earnings volatility.

Conclusion: Transformation Complete, Growth Phase Begins

RPM International has successfully completed one of the most comprehensive operational transformations in the specialty chemicals industry, with MAP 2025 delivering $325 million in savings, 260 basis points of margin expansion, and a streamlined three-segment structure. The company is now deliberately sacrificing near-term margin leverage to invest in growth, expanding sales forces, increasing marketing, and acquiring strategic assets like Pink Stuff while larger competitors retrench. This pivot creates a compelling asymmetry: if end markets recover as expected in late 2026, RPM will capture disproportionate share with a leaner cost structure and enhanced capabilities.

The investment thesis hinges on two critical variables: the duration of DIY market softness and the company's ability to absorb fixed costs from growth investments. While housing turnover remains at 40-year lows and tariff headwinds persist, RPM's ability to generate 5.4% organic growth in CPG and 6.7% in PCG despite these headwinds demonstrates underlying business strength. The temporary margin contraction across all segments in Q1 FY26 represents the cost of building a growth platform, not structural deterioration.

For investors, the key question is whether the market has properly priced the transition from efficiency to expansion. At 19.8x earnings with a healthy balance sheet and strong cash generation, RPM appears reasonably valued for a company that has fundamentally improved its operational leverage while maintaining the entrepreneurial culture that drives niche market leadership. The next twelve months will reveal whether growth investments translate to accelerated organic growth, making this a critical period for assessing the durability of RPM's competitive moat.