Masco Remains Neutral

We have maintained a Neutral recommendation on Masco Corporation (MAS - Analyst Report) following the appraisal of its third quarter 2012 results.

Masco’s adjusted earnings of 13 cents per share in the third quarter of 2012 increased 44% year over year and beat the Zacks Consensus Estimate by a penny. Net sales were flat year over year as well as with the Zacks Consensus Estimate at $1.98 billion; hurt significantly by currency headwinds, sluggish big ticket remodeling activity in the U.S., weakness in Europe and challenges in the cabinetry business. Organic revenues, however, grew 2% on the back of higher selling price, innovation and increase in new home construction activity in the U.S.

Masco Corporation manufactures, sells, and installs home improvement and building products. Its main 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 the market leader for 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.

Going forward, management is apprehensive about the weak big ticket remodeling industry and slow European economies. Further, Masco’s Cabinet business has been sluggish for sometime, mainly because the repair and remodel spending trends have slowed in the U.S. and the dealer segment is not showing any major traction.

Despite the short-term headwinds, we like the long-term fundamentals of Masco. 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.

Masco has taken several strategic initiatives to boost long-term growth. These initiatives include improvement of underperforming businesses like Installation and Cabinet; leveraging its brands and continued innovation, reducing costs and strengthening its balance sheet. The company’s cost-saving initiatives included business consolidations, system implementations, plant closures, improvement in the global supply chain and headcount reductions. The restructuring initiatives are expected to result in about $175 million of gross cost reduction, excluding the impact of inflation in 2012.

Moreover, the housing dynamics are improving in North America. The new home construction activity in North America is benefiting from improved demand and affordability of homes, owing to low mortgage rates and increased rentals as well as rising home prices. Inventory of existing homes is declining and there is limited supply of new homes in the market, thus stabilizing home prices. In 2011, 75% of Masco’s top line was related to repair/remodel activity, and the remaining 25% was derived from new home construction. Though the new home construction market is improving, the overall recovery, and repair and remodel activity is still moderate and uneven. However, once the housing market recovers substantially, we believe the recovery, repair and remodel market will see significant improvement. Masco competes with Owens Corning (OC - Snapshot Report), which carries a Zacks #3 Rank (short-term 'Hold' rating).