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Will Masco Gain from the Expected Rise in Construction Spend?

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On Jun 25, we issued an updated research report on Masco Corporation (MAS - Free Report) .

After a strong 2013, Masco began 2014 on a softer note missing the Zacks Consensus Estimate for both revenues and earnings in the first quarter, as North American sales and profitability were impacted by rough weather and slowdown in construction activity.

Adjusted earnings of 15 cents per share for this Zacks Rank #4 (Sell) company increased 15.4% year over year as decent margins made up for the relatively softer revenue performance. Revenues of $1.97 billion grew 4.8% year over year as strong international sales made up for softer North American revenues.

Currently, around 70% of Masco’s top line is contributed by repair/remodel activity and the remaining 30% comes from new home construction. With the U.S. residential activity slowing down in the second half of 2013, demand for Masco’s products in the construction market has begun to decline. Rising interest rates, higher home prices, unfavorable weather conditions, shortage of lots and skilled labor, rising cost of materials and declining inventory of new homes have slowed down the housing recovery in the latter half of 2013 and early 2014.

Despite improving in 2013, Masco’s Cabinet business remained weak in the first quarter of 2014 due to severe weather and slowdown in housing construction. Though management expects sales to pick up in the second half of 2014 helped by product launches and improvement in the weather, we are not confident about a turnaround in the second quarter.

However, in spite of the near-term weakness, we have faith in Masco’s strong fundamentals. We are encouraged by its leading brand portfolio, continued focus on product innovation and cost improvements. Further, Masco boasts partnership with some of the biggest companies. In the direct to builder channel, it serves large homebuilders like PulteGroup, Inc. (PHM - Free Report) , Lennar Corporation (LEN - Free Report) and D.R. Horton, Inc. (DHI - Free Report) . In the retail channel, it has partnerships with big-box retailers like Home Depot and Lowe’s. Masco is the largest supplier of non-commodity products to Home Depot’s and kitchen and bath aisle to Lowe's.

Moreover, though housing has slowed down lately, it is believed that construction spending will gain steadily through the remaining of this year. The housing recovery is expected to result in a simultaneous rise in demand and volume for Masco’s home improvement products. The positive trends in new home construction, repair and remodel, home price appreciation, and an increase in big ticket spending in North America are expected to continue through the rest of 2014.

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