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Masco's EPS Beats, Rev Flat Y/Y

MAS URI

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Masco Corporation’s (MAS - Analyst Report) adjusted earnings of 13 cents per share in the third quarter of 2012 beat the Zacks Consensus Estimate by a penny. Earnings also grew 44% from the prior-year quarter profit of 9 cents, driven by an increase in new home construction activity in North America.

Masco’s net sales of $2.0 billion in the reported quarter were in line with the Zacks Consensus Estimate. Revenues were flat year over year, hurt significantly by currency headwinds and a sluggish North American economy. Organic revenues were up 2% year over year, driven by increases in selling prices, new home activities and affordability of homes owing to low mortgage rates and increased rentals.

North American sales grew 4%, on the back of increasing new home construction while International sales declined 12% due to weak macroeconomic conditions in Europe. In local currencies, International sales declined 3% from the prior-year quarter.

The company generates revenue from five business segments: Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products.

Cabinets and Related Products: Cabinets and Related Products segment revenue was $291 million in the third quarter of 2012, down 5% y/y, due to weak European conditions, foreign currency headwinds and closure of some cabinet product lines.

Plumbing Products: The segment recorded revenue of $736 million in the third quarter of 2012, down 4% y/y. Revenues plunged due to weak sales volume in International operations and unfavorable currency translations.

Installation and Other Services segment: Installation and Other Services segment revenue was $312 million in the third quarter of 2012, up 9% y/y, owing to a rise in construction of new homes, growth in retro sales and commercial sales.

Decorative Architectural Products: Decorative Architectural Products segment revenue was $481 million in the third quarter of 2012, up 6% y/y, owing to sales volume growth of builder’s hardware and higher selling prices of paints and stains and builders’ hardware.

Other Specialty Products: Other Specialty Products segment revenue was $156 million in the third quarter of 2012, down 3% y/y, due to currency translations and decline in North American sales volume as the company exited certain window businesses in the U.S. in late 2011.

Adjusted gross profit increased to $523 million in the third quarter of 2012, up 4% from the prior-year quarter. Gross profit margins were 26.5% in the quarter, up 110 basis points year over year, led by cost efficiency and improved commodity/price relationship.

Adjusted operating profit was $142 million in the third quarter of 2012, up 10.9% from the prior-year quarter. Adjusted operating margin increased to 7.2% in the quarter, up 70 basis points from the prior-year quarter, owing to profit improvement strategies.

Outlook

The company is positive about the improving new home construction industry and improving liquidity position. The company believes that product innovation and favorable price commodity relationship will contribute to growth in the upcoming quarters.

The company expects the Installation segments to perform well in the fourth quarter of 2012, owing to an increase in new home construction activities in North America. However, management is apprehensive about the weak big ticket remodeling industry. The company is also concerned about the slow European economies; volatile commodity cost and uneven recovery of the U.S repair and remodel industry.

Currently, we have a Neutral recommendation on Masco Corporation, a peer of United Rentals Inc. (URI - Snapshot Report). The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

We are positive about the long-term fundamentals of Masco. 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. However, the company’s revenues were hurt significantly by currency headwinds and challenges in the cabinetry business. Management is also apprehensive about the volatility in North American repair/remodel markets and challenges in Europe. Therefore, we prefer to remain on the sidelines.
 

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