Masco Stays Neutral
by Zacks Equity ResearchMarch 29, 2012 | Comments : 0 Recommended this article: (0)
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The company reported a broader loss of 9 cents per share in the fourth quarter of 2011 compared with a loss of 8 cents per share in the fourth quarter of 2010 (excluding special items) and the Zacks Consensus Estimate of a loss of 3 cents. Marginal top-line growth and reduced gross margins led to escalating loss. Sales in the quarter were flat at $1.7 billion compared with the fourth quarter of 2010 due to low cabinet, plumbing and windows and door sales. Gross margins were 21.9% compared with 23.5% in the year-ago quarter. (Please read our full report at Masco Reports Broader Loss).
Masco Corporation manufactures, sells, and installs home improvement and building products. Its mains products and services include plumbing products, cabinets and related products, installation and other services, decorative architectural products, and other specialty products. The company owns some of the popular brands like KraftMaid and Merillat cabinets, Delta and Hansgrohe faucets, Behr paint and Milgard windows. Moreover, the company is also experimenting on new products. We believe that the company’s leadership brands, its continued focus on innovation and new product launches can help drive growth in the long term.
However, falling prices have made homes a less lucrative investment for buyers, reducing demand for Masco’s products. Masco’s business largely depends on the home improvement and new home construction market which is currently experiencing a slowdown. The downturn in the housing industry led to lower demand for new homes and an oversupply of homes in the market, thus generating a downward pressure on home prices. This combined with low consumer confidence, high unemployment rates and reduced credit availability lowered discretionary consumer spending for home improvements and new home construction, thus hurting the company’s earnings and sales. Further, new homes are facing tough competition from housing alternatives, including resale homes, foreclosed homes, short sale homes and rental housing. Besides, the Euro-zone crisis has capped overall economic activity with spill-over effects felt in the US too, limiting top-line growth at Masco. Other than that rising prices of raw materials are impacting the company’s margins.
In 2011, the company completed the restructuring and rationalizing of its businesses and managing its cost structure in order to cope with challenging industry conditions. The company’s initiatives include business consolidations, system implementations, plant closures, improvement in the global supply chain and headcount reductions. The main rationale behind this move is efficient cost management. The restructuring initiatives are expected to result in about $150 million of gross cost reduction before inflation in 2012.
Management however believes that its cost cutting initiatives and top-line growth efforts, though failing to fetch the desired results in 2011, will drive significant improvement in 2012, even if the housing market continues to remain weak. Management believes the segments that were most hurt by restructuring, namely Installation and North American Cabinet Operations, would begin to show signs of growth in 2012. Sharing management’s optimism we prefer to wait and see how the year 2012 unfolds for homebuilders.
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