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Rising Material Costs to Impact Mohawk's (MHK) Q3 Earnings
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Mohawk Industries, Inc. (MHK - Free Report) is slated to report third-quarter 2018 results on Oct 25. In the last reported quarter, the company’s earnings and revenues missed the Zacks Consensus Estimate by 9.5% and 0.04%, respectively.
Also, the bottom line decreased 6% year over year due to input cost inflation, higher transportation costs, a stronger dollar and stringent labor market. Additionally, changing product mix, timing of price increases, lower production units, start-up of new projects and delayed Godfrey Hirst closing added to the woes.
Nevertheless, Mohawk’s top line increased 5% year over year on higher sales across all segments.
Let us delve into the factors that might affect Mohawk’s third-quarter 2018 results.
Factors at Play
Rising material costs have been impacting the company’s carpet business in the United States. Again, labor, energy and fuel-related costs have been negatively impacting its results. In the first six months of 2018, cost of sales grew more than 9%, pressurizing gross profit margins by 174 basis points.
In order to offset material and freight inflation, the company has been increasing carpet prices. During the first six months of 2018, it increased carpet price two times. This was followed by a third increase recently. The faster rate of price increases impacted the results in the previous quarters. It also increased freight charges to ease higher transportation costs stemming from increasing fuel, labor and common carrier expenses.
That said, in a bid to reduce the effect of higher input costs, Mohawk has planned to undertake a comprehensive approach to improve its performance and profitability in the United States. The company expects to increase pricing, improve sales in growing channels and reduce cost, which is expected to aid the second half of 2018.
Considering the above-mentioned headwinds, it expects third-quarter earnings (excluding one-time charges) in the range of $3.54-$3.64 per share, lower than the prior-year profit level of $3.75 per share. The Zacks Consensus Estimate for earnings is pegged at $3.59, reflecting a decrease of 4.3% year over year.
Meanwhile, shares of Mohawk have lost 44.3% over the past year. Earnings estimates for the current quarter and year have also declined 0.3 and 0.4%, respectively, over the past 30 days.
However, the introduction of innovative products across its portfolio is expected to improve overall sales, which will be reflected in the upcoming quarterly results. The company holds a dominant market share in the hugely fragmented and competitive industry. In addition, it commands a competitive advantage in the laminate flooring channel, backed by the Laminate and Wood segment’s industry-leading design, patented technologies and brands.
During the second quarter, Mohawk started a new carpet tile plant in Europe. Moreover, the company is establishing a commercial sales force of late. Also, it is constructing a sheet vinyl plant to add another flooring category in the ceramic and laminate business, as a result of improving Russian economy. The company is anticipating the positive impact of these innovations through 2019.
Additionally, it is likely to benefit from the strategy of driving growth through acquisitions, which will be evident in the to-be-reported quarter. During the first quarter of 2018, Mohawk completed the acquisition of three businesses in the Flooring ROW segment. Notably, net sales at the Flooring ROW segment increased 16% year over year in the second quarter. On a constant-currency basis, sales improved 8%, attributable to improved price, product mix and productivity. The trend is expected to have continued in the to-be-reported quarter as well.
Meanwhile, Mohawk enjoys a strong international presence, with higher net sales being generated outside the United States. Strong international presence allows the company to capitalize on high demand in the lucrative global market. During the second quarter, approximately 63% of net sales were generated in the United States and approximately 37% outside the country.
It expects continued strength in Europe and Russia, where inflation and shifting product preferences are less intense than the United States. Overall, the consensus estimate for total revenues is pegged at $2.61 billion, reflecting a 6.8% year-over-year increase.
What Does the Zacks Model Say?
Our proven model does not conclusively show that Mohawk is likely to beat estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.
Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.2%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Mohawk currently carries a Zacks Rank #4 (Sell).
We caution against stocks with a Zacks Rank #4 and 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stocks to Consider
Here are some companies in the Zacks Construction sector, which, according to our model, have the right combination of elements to post an earnings beat in their respective quarters to be reported.
KBR, Inc. (KBR - Free Report) has an Earnings ESP of +0.65% and carries a Zacks Rank #3. The company is expected to report quarterly results on Oct 30.
M.D.C. Holdings, Inc. (MDC - Free Report) has an Earnings ESP of +4.28% and a Zacks Rank #3. The company is scheduled to report quarterly results on Nov 1.
Dycom Industries, Inc. (DY - Free Report) has an Earnings ESP of +3.53% and holds a Zacks Rank #3. The company is expected to report quarterly numbers on Nov 19.
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It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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Rising Material Costs to Impact Mohawk's (MHK) Q3 Earnings
Mohawk Industries, Inc. (MHK - Free Report) is slated to report third-quarter 2018 results on Oct 25. In the last reported quarter, the company’s earnings and revenues missed the Zacks Consensus Estimate by 9.5% and 0.04%, respectively.
Also, the bottom line decreased 6% year over year due to input cost inflation, higher transportation costs, a stronger dollar and stringent labor market. Additionally, changing product mix, timing of price increases, lower production units, start-up of new projects and delayed Godfrey Hirst closing added to the woes.
Nevertheless, Mohawk’s top line increased 5% year over year on higher sales across all segments.
Mohawk Industries, Inc. Price and EPS Surprise
Mohawk Industries, Inc. Price and EPS Surprise | Mohawk Industries, Inc. Quote
Let us delve into the factors that might affect Mohawk’s third-quarter 2018 results.
Factors at Play
Rising material costs have been impacting the company’s carpet business in the United States. Again, labor, energy and fuel-related costs have been negatively impacting its results. In the first six months of 2018, cost of sales grew more than 9%, pressurizing gross profit margins by 174 basis points.
In order to offset material and freight inflation, the company has been increasing carpet prices. During the first six months of 2018, it increased carpet price two times. This was followed by a third increase recently. The faster rate of price increases impacted the results in the previous quarters. It also increased freight charges to ease higher transportation costs stemming from increasing fuel, labor and common carrier expenses.
That said, in a bid to reduce the effect of higher input costs, Mohawk has planned to undertake a comprehensive approach to improve its performance and profitability in the United States. The company expects to increase pricing, improve sales in growing channels and reduce cost, which is expected to aid the second half of 2018.
Considering the above-mentioned headwinds, it expects third-quarter earnings (excluding one-time charges) in the range of $3.54-$3.64 per share, lower than the prior-year profit level of $3.75 per share. The Zacks Consensus Estimate for earnings is pegged at $3.59, reflecting a decrease of 4.3% year over year.
Meanwhile, shares of Mohawk have lost 44.3% over the past year. Earnings estimates for the current quarter and year have also declined 0.3 and 0.4%, respectively, over the past 30 days.
However, the introduction of innovative products across its portfolio is expected to improve overall sales, which will be reflected in the upcoming quarterly results. The company holds a dominant market share in the hugely fragmented and competitive industry. In addition, it commands a competitive advantage in the laminate flooring channel, backed by the Laminate and Wood segment’s industry-leading design, patented technologies and brands.
During the second quarter, Mohawk started a new carpet tile plant in Europe. Moreover, the company is establishing a commercial sales force of late. Also, it is constructing a sheet vinyl plant to add another flooring category in the ceramic and laminate business, as a result of improving Russian economy. The company is anticipating the positive impact of these innovations through 2019.
Additionally, it is likely to benefit from the strategy of driving growth through acquisitions, which will be evident in the to-be-reported quarter. During the first quarter of 2018, Mohawk completed the acquisition of three businesses in the Flooring ROW segment. Notably, net sales at the Flooring ROW segment increased 16% year over year in the second quarter. On a constant-currency basis, sales improved 8%, attributable to improved price, product mix and productivity. The trend is expected to have continued in the to-be-reported quarter as well.
Meanwhile, Mohawk enjoys a strong international presence, with higher net sales being generated outside the United States. Strong international presence allows the company to capitalize on high demand in the lucrative global market. During the second quarter, approximately 63% of net sales were generated in the United States and approximately 37% outside the country.
It expects continued strength in Europe and Russia, where inflation and shifting product preferences are less intense than the United States.
Overall, the consensus estimate for total revenues is pegged at $2.61 billion, reflecting a 6.8% year-over-year increase.
What Does the Zacks Model Say?
Our proven model does not conclusively show that Mohawk is likely to beat estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.
Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.2%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Mohawk currently carries a Zacks Rank #4 (Sell).
We caution against stocks with a Zacks Rank #4 and 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Stocks to Consider
Here are some companies in the Zacks Construction sector, which, according to our model, have the right combination of elements to post an earnings beat in their respective quarters to be reported.
KBR, Inc. (KBR - Free Report) has an Earnings ESP of +0.65% and carries a Zacks Rank #3. The company is expected to report quarterly results on Oct 30.
M.D.C. Holdings, Inc. (MDC - Free Report) has an Earnings ESP of +4.28% and a Zacks Rank #3. The company is scheduled to report quarterly results on Nov 1.
Dycom Industries, Inc. (DY - Free Report) has an Earnings ESP of +3.53% and holds a Zacks Rank #3. The company is expected to report quarterly numbers on Nov 19.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>