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Bear of the Day: Mohawk Industries (MHK)

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Mohawk Industries (MHK - Free Report) is a Zacks Rank #5 (Strong Sell) designs, manufactures, sources, distributes, and markets flooring products for remodeling and new constructions of residential and commercial spaces.

The stock has been on a steady slide since its highs in 2021, down over 60% from the high mark of $231.80. so far in 2022, the stock is down 50% and drifting towards its COVID lows.

So, is there any reason to buy this dip?

While the company did beat Q2 earnings, a big guide lower forced analysts to take down numbers. Until this momentum to the downside improves, investors should shy away.

About the Company

Mohawk is headquartered in Calhoun, GA. The company was founded in 1982 and employs 43,000 people.

Mohawk manufactures carpet, rugs, ceramic tile, laminate, wood, stone, and vinyl flooring. This makes the company sensitive to housing improvements, which has been hurt due to higher interest rates.

The company has reorganized its business into three segments — Global Ceramic (35% of net sales), Flooring North America (Flooring NA) (37% of net sales), and Flooring Rest of the World (Flooring ROW) (28% of net sales).

MHK is valued at $6 billion and has a Forward PE of 7. The company holds a Zacks Style Scores of “A” in Value, but “D” in Growth. The stock is a value play for most, but pays no dividend.  

Q2 Earnings

The company last reported EPS on July 28th, beating expectations by only 1%. Revenues came in slightly below expectations, but the company guided Q3 lower.

Instead of the expect $4.14, the company now sees Q3 at a range of $3.33-3.43. The company announced they will cut expenses and implementing multiple restructuring projects to cut costs.

Management said that they needed to adapt to current conditions to improve results. This means cost cutting by $30-$40 million annually.

Estimates

Because of the guide lower, analysts have been forced to lower their estimates.

For the current quarter, over the last 60 days estimates have dropped 14%, from $4.05 to $3.47. For next quarter, the numbers have fallen 11% over the same time frame.  

Analyst are not being as aggressive in dropping their numbers for next year, as they likely want to see how the cost cutting is implemented. For next year, estimates have fallen only 9%.

Technical Take

Like most stocks this year, it is trading under all the moving averages. The 50-day MA is at $114 and the 200-day is at $135. These levels are significantly above the current trading price.

The stock has been bleeding out and is looking for support. The next area of interest for the bulls is all the way down at $80. So, patience is suggested with this name.

In Summary

Mohawk is going to struggle as long as interest rates continue to go higher. The effect that rates have on housing and consumers will likely hurt earnings. Add in higher inflationary costs and the cost cutting program might not be enough to improve results.  

For those interested in the home furnishing space, a better option in the sector might be Interface (TILE - Free Report) . The stock is a Zacks Rank #3 (Hold) that has beaten on EPS every quarter since Q2 of 2017.


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