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On Jul 3, we maintained a Neutral recommendation on Masco Corporation (MAS - Analyst Report) based on sluggish first-quarter 2013 results.

Why the Neutral Recommendation?

Masco’s first-quarter 2013 adjusted earnings of 13 cents per share lagged the Zacks Consensus Estimate of 14 cents by 7.1% due to lower-than-expected revenues. Its net sales of $1.88 billion lagged the Zacks Consensus Estimate of $1.99 billion by 5.5%. We believe that the top line missed the Zacks Consensus Estimate due to weak performance in Europe and unfavorable weather conditions in both Europe and the U.S.

Earnings, however, improved 85.7% year over year driven largely by margin growth from cost savings and better year-over-year top-line growth. Revenues rose 3.9% year over year as the strong performance in North America was offset by weak European sales. Consolidated margins improved significantly in the quarter driven by cost controls and better operating leverage.

Overall, we have faith in Masco’s long term fundamentals and are encouraged by its continued focus on product innovation and cost improvements. The company is also divesting its less-profitable and underperforming assets to focus more on its core areas.

However, the housing downturn and overall economic recession in the past 4-5 years significantly hurt consumer spending on home improvement, especially large kitchen and bathroom remodeling. Though some improving trends are being seen in repair/remodeling spending, we prefer to wait until we see a substantial resumption in spending for home improvements, especially for large-projects.

Moreover, Masco’s Cabinet business has been sluggish for some time mainly because of the slowdown in consumer spending for big ticket remodeling. The Eurozone crisis also remains a persistent overhang.

Other Stocks to Consider

Masco carries a Zacks Rank #3 (Hold). Stocks in the building/construction industry that are currently doing well include Eagle Materials, Inc. (EXP - Snapshot Report), USG Corporation (USG - Snapshot Report) and Armstrong World Industries, Inc. (AWI - Analyst Report). While EXP carries a Zacks Rank #1 (Strong Buy), USG and AWI carry a Zacks Rank #2 (Buy) each.

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