RPM International's Index Exclusion: A Contrarian Crossroads Amid Sector Shifts

The recent exclusion of RPM International (NYSE:RPM) from the Russell 1000 Growth-Defensive Index has sparked questions about its strategic positioning in an evolving market landscape. While FTSE Russell's official reconstitution documents do not explicitly name RPM as a deletion candidate, the company's declining financial trajectory and shifting sector dynamics align with broader trends reshaping equity indices. For contrarian investors, this presents a paradoxical opportunity: a company sidelined by indexing mechanics might now offer asymmetric upside in a market hungry for undervalued industrials.

The Indexing Context: Why RPM Likely Fell Out

The Russell 1000® Growth-Defensive Index, part of FTSE Russell's style-based reclassification, prioritizes firms with high growth prospects and defensive sector exposures. RPM's removal likely stems from two factors:
1. Market Cap Compression: Despite a $1.48 billion third-quarter sales run rate, RPM's trailing 12-month revenue has contracted by 5% year-over-year. Combined with a market cap of ~$2.5 billion (as of June 2025), it may have fallen below the Russell 1000's growth-oriented breakpoint thresholds.
2. Sector Shifts: The Russell 1000® Value Index is increasingly tilted toward technology and communication services (e.g., Amazon, Meta), while industrials like RPM—exposed to construction volatility and currency headwinds—struggle to meet “growth” criteria.

RPM's Struggles: A Temporary Dip or Structural Weakness?

RPM's Q3 2025 results reveal challenges but also resilience:
- Margin Pressure: EBIT dropped 33% year-over-year due to plant consolidations and MAP 2025's inventory reduction strategy. However, operating cash flow hit $91.5 million, a record for the quarter.
- Strategic Leverage: The acquisition of Star Brands (owner of The Pink Stuff) adds $150 million in annual sales, targeting high-margin consumer products. This moves RPM closer to its “Consumer Group” focus, which accounts for 34% of sales.
- Balance Sheet Strength: Debt reduced to $2.1 billion, with $1.21 billion in liquidity, provides flexibility for opportunistic M&A or share buybacks.

Contrarian Opportunity: The Case for a Turnaround

While RPM's near-term earnings face headwinds from tariffs and weather disruptions, its long-term catalysts remain intact:
1. Repair & Maintenance Tailwinds: Its brands—Rust-Oleum, DAP, and Weed-B-Gon—benefit from secular demand in home repair, which typically outperforms new construction. Management emphasized leveraging this in slow-growth economies.
2. Operating Leverage Potential: MAP 2025's cost-cutting could deliver margin expansion if production volumes rebound. The $36 million inventory reduction suggests a leaner operational base for 2026.
3. Undervalued Metrics: At 8.2x 2025E EBITDA (vs. 12x historical average), RPM trades at a discount to peers like Sherwin-Williams (20x) or RPM's own 5-year average.

Risks to Consider

• Execution Risk: The Star Brands integration and plant consolidations require flawless execution to avoid further margin dilution.
• Tariff Volatility: Raw material costs (mid-single-digit increases) could squeeze margins further if price hikes fail to offset costs.
• Index Dynamics: If RPM's exclusion leads to passive fund selling, near-term volatility may persist until Q4 earnings clarity emerges.

Investment Thesis

RPM's exclusion from the Russell 1000 Growth-Defensive Index is less a reflection of corporate failure than a symptom of broader index tilts toward tech and growth. For investors with a 12–18-month horizon, the company's discounted valuation, cash flow strength, and strategic moves into high-margin consumer brands position it as a contrarian bet.

Recommendation:
- Buy on dips below $22/share (current June 2025 price ~$23), targeting a $28–30 price target by 2026 based on normalized margins.
- Monitor: Q4 2025 earnings for MAP 2025 progress and Star Brands integration updates.
- Avoid: If EBITDA margins fall below 12% or debt/EBITDA exceeds 3.5x.

In an era of index-driven flows, RPM's sidelining could be its savior. For investors willing to look past short-term noise, this industrials stalwart may offer a rare blend of value and strategic upside.