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Tickers in this Article: RPM, DOW, MON
Paint, coating and sealants maker RPM International (NYSE:RPM) is a small-cap that has historically carved an impressive niche for itself, but now its growth prospects have been impaired. RPM serves the industrial and consumer sector, both of which have been hard hit by the economic slump, so the question is to what extent and how long will this affect the company? Also, we'll look at whether and when the stock might be worth considering as a buy.

Model Cars, Eifel Towers and More
RPM has an eclectic mix of products. Need to put the finishing touches on that exquisite model Corvette you built on your tabletop because funds were a little tight to afford the full-sized version? RPM has you covered with its Testor model paints. If your project is a bit bigger - "bigger" as in painting the Eifel Tower - RPM is still the company to turn to. It's products range from the functional to the almost exotic. Day-Glo and Rustoleum are RPM products, and so are many other well-known household and industrial products such as DAP, a caulk and the like. The company makes many products we use, yet we're not usually aware it's an RPM product. It is an ubiquitous, under-the-radar company.

The Strategy
RPM functions as a small-cap holding company, headquartered near Cleveland, Ohio, which purchases and integrates other like companies, profitable companies, as subsidiaries. The companies retain their management and a certain degree of autonomy within the larger RPM structure, while contributing to the bottom line. RPM has a long history of being profitable and consistently raising dividends. This is a unique approach for a small cap. Think of RPM as a nimble mini-conglomerate, with several well-running complementary pieces which contribute to the whole. (To learn more, read Conglomerates: Cash Cows Or Corporate Chaos?)

The Present
After continuing with roughly 15% annual growth from fiscal 2006 to 2008, and initial guidance after the last earnings report that predicted near-term flat earnings, RPM has recently given mid-quarter guidance that said it will not reach its immediate targets next quarter. Added to this has been an extraordinary charge against earnings it has taken for asbestos liability assessments, which have, of course, also depressed its numbers. This has had its due impact on earnings per share, and shot the P/E ratio up to 38, double RPM's historic number. On the face of this sort of news, you might wonder why consider the stock for purchase?

A Pause, Not an End to Growth
The earnings numbers may have already reflected the worst of the slowdown given that the two segments of its customer base, both consumer and industrial, have duly suffered in the recently-pronounced recession. In management's statements regarding the asbestos settlement, as well as their mid-term conference call detailing the set-aside numbers for paying the settlement, two things emerge: the claims are mostly paid, and RPM has a good deal of cash on hand in reserve. As a bonus, its cash versus debt load is also favorable ($500+ million versus $164 million). These things position the company to go forward well.

The do-it-yourself market and hobbyist market of consumers may improve first in their customer base, as people fix up homes and tend to stay in their current homes or apartments during economic slowdowns, rather than buying a new home. If, however, you add the two components in the housing industry - that the recession may have bottomed and that infrastructure work and repair will pick up - then you have a case for the industrial segment of RPM's business to improve on the horizon. It also does not truly have the kind of direct competitor from companies such as Dow Chemical (NYSE:DOW) or Monsanto (NYSE:MON) that can hurt it in close competition, as it is spread among chemical, consumer, industrial and mostly specialty products.

A Value/Growth Time Horizon
If you add in this intriguing mix, and are prepared to have even a two-to-three year time horizon for both value and growth in RPM to be realized (along with needed stock market conditions to improve), you will likely be rewarded with a pleasant surprise. Even now, with RPM hitting this uncharacteristic speed bump, it is paying an excellent dividend (6%) and is positioned well to realize value when the stock price rebounds, and then again when further growth is realized in the next couple of years. RPM can be a terrific investment vehicle for the patient, astute, long-term investor.

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