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Why Is Mohawk Industries (MHK) Up 7% Since Last Earnings Report?

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A month has gone by since the last earnings report for Mohawk Industries (MHK - Free Report) . Shares have added about 7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Mohawk Industries due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Mohawk's Q2 Earnings and Revenues Beat Estimates

Mohawk Industries, Inc. reported solid second-quarter 2020 results, wherein earnings and revenues handily surpassed the Zacks Consensus Estimate.

As highlighted by Jeffrey S. Lorberbaum, chairman and CEO of Mohawk, “After the company’s sales bottomed in April, our markets improved more than we expected, and shipments exceeded our production rates, reducing our inventories.”

Mohawk reported adjusted earnings of 37 cents per share against the consensus mark of a loss of 8 cents. However, the metric declined 87.2% year over year.

Net sales of $2 billion surpassed the consensus estimate of $1.9 billion by 7.9% but fell 20.7% from the year-ago figure. On a constant-currency and days basis, net sales were down 19% year over year.

Operating Highlights

Adjusted gross profit of $439.4 million was down 40.9% year over year. Adjusted selling, general and administrative expenses decreased 13.5% from the prior-year level. Adjusted operating income totaled $35.8 million, which declined 87.1% year over year.

Segment Details

Global Ceramic: Sales in the segment totaled $753.3 million, down 21% year over year. Also, the metric declined 19% on a constant currency and days basis. Adjusted operating income decreased to $3.9 million from $117.7 million a year ago due to lower volume, unfavorable price and mix, as well as COVID-19-induced shutdown.

Flooring North America: Net sales at the segment came in at $800 million, down 19% year over year. Moreover, the segment registered adjusted operating loss of $17.3 million for the quarter versus an operating profit of $65.4 million a year ago. Improvement in productivity and reduction in inflation were offset by lower volume, price, mix and the COVID-19 outbreak.

Flooring Rest of the World: Net sales in the segment fell 23% year over year to $496.4 million. On a constant-currency and days basis, sales were down 20% from the year-ago level. Adjusted operating income was $59.1 million, down from $105.7 million a year ago. The downside was due to lower price and mix, and volume and shutdown costs, partially offset by reduced inflation along with increased productivity.

Financial Highlights

As of Jun 27, 2020, cash and cash equivalents were $737.7 million compared with $128.1 million in the comparable year-ago period. For the second quarter, it generated free cash flow of almost $500 million and issued more than $1 billion of new bonds.

Net debt was $1.97 billion at second quarter-end, down from $2.46 billion in the first quarter.

Efforts to Combat COVID-19

The company has been undertaking business restructuring measures to boost its performance that include reducing SG&A, headcount, and lower-performing products as well as SKUs. It has also been closing less efficient operations and investing in more productive equipment. The company expects these global actions to deliver annual savings of $110-$120 million, with an estimated cost of $170 million, of which cash cost is $44 million. It will take almost the entire 2021 to complete these initiatives and capture the full benefit.

Third-Quarter View

Although Mohawk was unable to provide guidance for the third quarter due to uncertainties associated with the COVID-19 outbreak, it expects a significant improvement in the quarterly results from the second quarter.

The residential remodeling and new construction channels have recovered more than commercial, wherein businesses are maintaining a cautious approach to investment. Notably, its July sales were almost flat with the prior year.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 49.94% due to these changes.

VGM Scores

At this time, Mohawk Industries has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Mohawk Industries has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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