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On Apr 8, we maintained a Neutral recommendation on Masco Corporation (MAS - Analyst Report) despite solid fourth-quarter results as we await a significant momentum in the home improvement market.

Why the Neutral Recommendation?

Masco’s adjusted earnings of 4 cents per share in the fourth quarter of 2012 (results announced on Feb 11) improved significantly from the prior-year quarter’s loss of 1 cent. Net sales grew 8.6% year over year to $1.89 billion. 

Both top and bottom line results surpassed the Zacks Consensus Estimate. The solid quarterly results were driven by strong performance in North America and Masco’s profit improvement initiatives.

In order to cope with the challenging U.S. homebuilding industry and other headwinds like raw material cost inflation, Masco undertook several strategic initiatives. The initiatives included the improvement of underperforming businesses like Installation and Cabinet; leveraging its brands, new product introduction and product innovation, reducing costs and strengthening its balance sheet. These initiatives have started to show some beneficial results.

Following the fourth-quarter beat, estimates largely moved upwards for 2013 and 2014.  The Zacks Consensus Estimate moved up by 20% to 66 cents in 2013 and 3.1% to $1.01 in 2014 over the last 60 days. Following the solid fourth-quarter results, Masco carries a Zacks Rank #2 (Buy).

The company is hopeful of further improved results in 2013 as both the new home construction and repair and remodel activities continue to recover. New home starts are expected to be up 20% to 25% in 2013. The repair/remodeling market is expected to continue to improve, though modestly.

However, consumer spending on big ticket remodeling still remains weak. Further, though the new home construction market (which significantly affects the home improvement business) is recovering, it is still below its historically low levels due to the current weak U.S. economic conditions and tight mortgage lending standards.

Moreover, Masco’s Cabinet business has been sluggish for some time mainly because of the slowdown in consumer spending for big ticket remodeling, though the smaller repair and remodel spending trends in the U.S. are showing some improvement. The Euro-zone crisis also remains a persistent overhang.

We therefore, prefer to wait until we see substantial recovery in the overall home improvement market.

Other Stocks to Consider

Other stocks in the building/construction industry that are currently doing well include James Hardie Industries plc (JHX - Snapshot Report) and Trex Co. Inc. (TREX - Snapshot Report) and USG Corp (USG - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

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