Masco Stays Neutral

We have maintained a Neutral rating on Masco Corporation ( MAS - Analyst Report ) following appraisal of first quarter 2012 results.

Masco Corporation 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. 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.

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.

(Please read our full report at Masco Beats on Volume.)

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 is a leading cabinetry manufacturer in the U.S. and holds the largest share in faucets and kitchen cabinets.

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.

The U.S. housing industry has begun to show some signs of improvement. Housing demand is improving, affordability is increasing and prices are stabilizing. 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, even if the housing market remains flat. The strong first quarter results are a testament to the fact.

Moreover, the company’s restructuring initiatives are almost done. These initiatives are expected to result in about $150 million of gross cost reduction before inflation in 2012. Management believes the segments that were most hurt by restructuring, namely Installation and North American Cabinet Operations, have begun to show signs of growth and the recovery is expected to continue through 2012.

Though there have been signs of a nascent improvement in the housing market so far in 2012 and Masco is expecting significant improvement this year, we prefer to wait and see how the year actually shapes up for the company. Particular emphasis will be on the cabinet business which has been sluggish since some time now. Besides, the Euro-zone crisis has capped overall economic activity limiting top-line growth at Masco. Further, rising prices of raw materials and an expensive valuation are matters of concern.