Masco Beats on Volumes

Masco Corporation (MAS - Analyst Report) reported earnings of 5 cents per share in the first quarter of 2012 versus a loss of 4 cents per share in the first quarter of 2011 (excluding special items). Earnings also beat the Zacks Consensus expectation of breakeven earnings. Improved top-line growth as well as impressive margins drove the earnings beat this quarter.

Consolidated Revenue and Margins

Sales in the quarter were up 7.0% over the prior-year period to $1.88 billion driven by improved volumes in the repair/remodel as well as new home construction businesses which were until now struggling to perform. An improving housing market combined with new product launches and overall share gains led to the volume growth in the quarter. Total sales also swept past the Zacks Consensus Estimate of $1.83 billion.

Sales in North America rose 9% to $1.3 billion due to improving housing activities in the region. However, international sales were up just 1% due to continued weakness in Europe. In local currencies, international sales were up 5% over the prior-year quarter.

Gross margins expanded 90 basis points (bps) to 26.5% due to higher revenues. Operating margins shot up 270 bps to 6.0% due to successful price management and the company’s profit improvement initiatives.

Segment Discussion

Sales in the Cabinets and Related Products segment dipped 3% to $297 million due to continued promotional activity in the retail businesses. However, operating loss narrowed to $20 million versus $29 million in the prior-year quarter. An improved new home construction market and cost-saving initiatives led to the narrower loss in the quarter. This segment, which was most hurt by the company’s restructuring activities in 2011, has begun to show some signs of growth on the back of cost cuts and other investments made last year.

The Installation and Other Services segment recorded an impressive revenue growth of 18% in the quarter to $278 million due to improvement in residential new home construction, continued expansion of the retrofit and commercial business and better insulation sales. Operating loss was also much narrower at $14 million versus $35 million in the prior-year quarter.

The above-mentioned businesses are expected to continue to improve through 2012.

Plumbing Products revenues increased 5% to $742 million due to increased sales in the retail, trade and international businesses. Plumbing’s adjusted operating margins expanded 160 bps over the prior-year quarter. Decorative Architectural Products revenues rose 16% to $434 million driven by new product launches. Sales at the Other Specialty Products segment however decreased 2% to $124 million due to the exit of certain window businesses in the US in late 2011.

Balance Sheet

Masco had cash and cash equivalents of $1.8 billion as of March 31, 2012 versus $1.7 billion as of December 31, 2011. The company’s long-term debt amounted to $3.6 billion as of March 31, 2012 compared with $3.2 billion as of December 31, 2011.

2012 Outlook

In 2011, the company’s top and bottom lines were hampered by the slowdown in new home construction, headwinds from foreclosure activities and restrained financial accessibility. The company undertook several strategic initiatives to cope with the challenging US homebuilding industry and other headwinds like raw material cost inflation. The initiatives included the improvement of underperforming businesses like Installation and Cabinet; leveraging its brands and continued innovation; and reducing costs. The company’s cost-saving initiatives included business consolidations, system implementations, plant closures, improvement in the global supply chain and headcount reductions. The main rationale behind this move was an efficient cost management.

Management 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. The strong first quarter results are a testament to the fact.

Our Recommendation

We currently have a Neutral recommendation on Masco Corporation. The stock carries a Zacks #3 Rank in the near term (‘Hold’ rating).

Overall, we are encouraged by Masco’s continued focus on product innovation and cost improvements. We also like the company’s initiative to restructure its business by exiting less profitable and underperforming assets. Though we are encouraged by the company’s strong first quarter results as well as signs of improvement in the housing industry in 2012, we prefer to wait and see how the year actually shapes up for the company. Rising prices of raw materials are affecting margins to a large extent. We therefore prefer to remain on the sidelines.