RPM INTERNATIONAL INC/DE/ (RPM) stock intrinsic value fair value estimate & owner earnings analysis

What the business is. RPM International owns a long-built collection of specialty coatings, sealants and building-materials businesses aimed, in its own words, at the maintenance and improvement needs of the construction, industrial and consumer markets. Fiscal 2026 (year to May 31, 2026) sales were $7.86 billion across three segments: Construction Products ($3.07 billion: Tremco roofing and sealants, Euclid concrete products, waterproofing), Performance Coatings ($2.13 billion: Carboline protective coatings, Stonhard flooring, fireproofing) and Consumer ($2.66 billion: Rust-Oleum, DAP, Zinsser, Bondo and The Pink Stuff, bought in fiscal 2025). About 70% of sales are in the United States, 15.5% in Europe and 6.5% in Canada. No customer is 10% of sales, although big-box home centers matter a great deal to the Consumer segment. How we measured earnings. We start from the cash the business generates from operations, strip out swings in inventories, receivables and payables, charge stock compensation as a real cost, and deduct the capital spending needed to keep the plants running (spending tied to sales growth is excluded, though it is small here). On that basis owner earnings per share were $2.98, $2.69, $2.29, $2.37, $3.77, $2.94, $3.21, $4.09, $4.36 and $5.19 for fiscal 2017 through 2026. Because we value the business before its lenders and then subtract the debt, we add back cash interest paid ($109 million in 2026), giving cash flow before lenders of $3.57, $4.10, $5.00, $5.08 and $6.05 per share for 2022 through 2026. Swings in working capital were large: inventory absorbed about $300 million of cash in 2022 during the raw-material shortage and released about $180 million in 2024, which is why reported operating cash flow ran from $179 million to $1.12 billion in those years; none of that timing is counted as earnings. Amortization of acquired intangibles (about $46 million a year) is added back because it is the accounting run-off of past purchase prices; we do not credit any growth from future acquisitions, so that run-off is not being treated as permanent earning power. The starting level. We use the median of fiscal 2022 to 2026, $5.00 per share (about $638 million) before interest. That window covers the business as it stands after the MAP to Growth and MAP 2025 cost programs, and it includes both a bad stretch (the 2022 to 2023 raw-material squeeze, when cash flow fell 19% in a year) and good ones. It sits well below fiscal 2026's $6.05, which included the first full year of The Pink Stuff and other recent purchases. Earlier years describe a smaller, lower-margin company and are left out of the level. Base case ($78.12 per share). Fiscal 2026 cash flow per share rose 19%; we assume none of that continues into fiscal 2027 and hold the year at $5.00, because the annual report warns that raw-material inflation tied to the Middle East conflict and tariffs will be a headwind in fiscal 2027, and Consumer organic sales already fell 2.6% in 2026. From 2028 we credit 2% a year, in line with fiscal 2026 organic growth (price plus volume, excluding acquisitions and currency) of 2.0% and well below the 5% a year sales have compounded over the past decade, reaching about $5.98 in year ten. After that the earning power is held flat, without further growth, on the strength of brands that have held their shelf and specification positions for decades (Rust-Oleum since 1921) and maintenance demand from the existing stock of buildings. The business is worth about $12.19 billion; net debt of about $2.22 billion leaves $9.97 billion, or $78.12 per share. Bear case ($55.31 per share). Two downturns this business has actually had, back to back. First, a raw-material squeeze like 2022 cuts cash flow 15% to $4.25 in fiscal 2027, with only a partial recovery to $4.50. Then a construction and do-it-yourself recession like 2008 to 2010, when RPM's segment operating profit for the first nine months of fiscal 2009 was 27% below the year before, takes it to $3.35, recovering over four years to $4.50. There is no growth after that, ever. That long-run level is roughly the cash margin RPM earned in its weaker years (2019, 2020, 2022 and 2023), applied to today's larger business. The business is worth about $9.28 billion; less $2.22 billion of net debt leaves $7.06 billion, or $55.31 per share. Even at the trough, cash flow before interest is about four times the interest bill. Bull case ($112.07 per share). The cost programs hold and fiscal 2026 proves representative: $5.75 in 2027 after the raw-material hit, then 3% a year, our estimate of the organic part of the decade's 5% sales growth and supported by the company's demonstrated ability to pass the 2021 to 2023 raw-material surge through to customers in price, for nine years and 2% for ten more, then flat. The business is worth about $16.52 billion; less $2.22 billion of net debt leaves $14.30 billion, or $112.07 per share. Acquisitions and buybacks are excluded from every case because they are paid for out of the same cash. Debt. At May 31, 2026 borrowings were $2.53 billion: a $598 million revolving credit line running to February 2031, $274 million under a receivables facility to April 2028, and fixed notes of $400 million at 3.75% due March 2027, $350 million at 4.55% due 2029, $300 million at 2.95% due 2032, $300 million at 5.25% due 2045 and $300 million at 4.25% due 2048. We subtract all of it, add back about $165 million of cash beyond operating needs, and credit about $150 million because the 2032, 2045 and 2048 notes lock in low fixed coupons for many years. Net leverage under the bank covenant was 1.70 times against a 3.75 times limit, so refinancing the March 2027 maturity is not a material risk. Margin-of-safety price ($44). How sure are we of the earnings level? Fairly sure: cash flow before lenders has been positive and between $409 million and $771 million in every one of the last ten years, and the worst year of the current business, fiscal 2022, still produced $463 million. The worst plausible event is a deep building recession arriving during a raw-material spike, or a large, debt-funded acquisition that disappoints (the 2025 purchases cost about $596 million, and goodwill was written down in 2017, 2023 and 2025). With leverage at 1.7 times, no customer above 10% and three separate segments, the company would come through either without diluting shareholders. If we are wrong about the two things most likely to be wrong, margins sliding back to the 2019 to 2023 range and organic growth stopping, the shares are worth about $55 to $66. The price assumes a three-year holding period, over which the business pays about $2.13 a share in dividends (raised every year for more than five decades). From $44, three years of dividends plus a rise to the base value imply about 24% a year; if growth never comes the implied return is about 18%, and in the bear case about 12%, with no permanent loss. That spread, centred above our 20% target with a cushion in the weaker outcomes, is why we set the margin-of-safety price at $44. What would make this wrong: a lasting loss of shelf space at the home centers, margins falling back below 2019 levels, or a large acquisition bought at a price the earnings never justify. Our previous published figures were prepared on a different basis and are not comparable.