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On Nov 27, we maintained a Neutral recommendation on Masco Corporation (MAS - Analyst Report) despite solid third-quarter results as we await substantial improvement in big ticket remodeling and the Cabinet segment.

Why the Reiteration?

After solid second-quarter results, Masco announced another strong quarterly result on Oct 29. Masco’s third-quarter 2013 adjusted earnings of 27 cents per share surpassed the Zacks Consensus Estimate of 25 cents by 8%. Earnings improved 92.9% year over year driven by solid revenues, strong operating leverage and margins.

Masco’s net sales of $2.15 billion also surpassed the Zacks Consensus Estimate by 2.4%. Revenues rose 12.4% year over year driven by strong volume growth. Volumes benefited from products/programs launches; increased new home construction activity and improvement in repair/remodel activity (including big-ticket remodeling) in North America; and increased outside U.S. sales. Both Installation and Cabinet segments once again showed strong profitability in the quarter after underperforming in 2012.

Estimates were mostly revised upwards following the solid third-quarter results. The Zacks Consensus Estimate for 2013 increased by almost 4% while that for 2014 moved up 2.7% over the past 30 days.

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 spending on home improvements, especially for large projects, resume substantially.

Moreover, though Masco’s Cabinet business improved in 2013, it was quite sluggish in the last couple of years. Though smaller repair and remodel spending trends in the U.S. are improving and the company witnessed some traction in big ticket remodeling in the last-reported quarter, we await substantial recovery. Also, the company is facing challenges in Europe.

Other Stocks to Consider

Masco carries a Zacks Rank #3 (Hold). Better-ranked stocks in the building/construction industry are CaesarStone Sdot-Yam Ltd. and James Hardie Industries plc (JHX - Snapshot Report) which carry a Zacks Rank #1 (Strong Buy). Another stock worth considering in the same industry is Trex Co. Inc. (TREX - Snapshot Report) which carries Zacks Rank #2 (Buy).

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