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Strategic Initiatives Aid Mohawk (MHK), Inflation Hurts

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Mohawk Industries, Inc. (MHK - Free Report) is gaining from strategic restructuring initiatives, focus on operational excellence and accretive acquisitions.

Recently, this leading global manufacturer of flooring products, reported better-than-expected results for second-quarter 2023, wherein its earnings and revenues surpassed the Zacks Consensus Estimate by 4.6% and 0.6%, respectively. This upside was attributable to sequential margin improvement across the enterprise on the back of seasonal improvements, increased production, productivity initiatives and lower input costs.

Shares of MHK have outperformed the Zacks Textile - Home Furnishing industry so far this year. Earnings estimate for 2023 has moved north to $9.38 per share from $9.36 over the past 30 days. This depicts analysts' optimism about the company’s growth prospects.

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However, the Zacks Rank #3 (Hold) company is suffering from ongoing inflationary pressures and a risky macroeconomic environment.

Let’s delve deeper.

Factors Favoring the Stock

Mohawk is consistently focusing on various strategic initiatives to maintain its ongoing growth momentum in the risky market. The initiatives highlight investments made to increase sales and reduce expenses by enhancing productivity, consolidating distribution points and improving administrative efficiencies. It has also been closing less efficient operations and investing in more productive equipment. The company now expects that these restructuring and integration actions will save $35 million annually.

Mohawk also engages in broadening its product portfolio via acquisitions to cater to a wider range of customers globally. Since 2013, it has completed 32 acquisitions till-second quarter 2023. This year, the company completed acquisitions of two ceramic tile businesses in Brazil and Mexico within the Global Ceramic segment.

Mohawk’s higher internal investments to boost its capacity and enter new markets also bode well. It selectively invests in greenfield projects and acquisitions (primarily in new product categories and geographies), cost-saving initiatives as well as share buyback to enhance long-term performance. The company is also adding unique capabilities to introduce differentiated products and anticipates higher productivity improvement in the days ahead.

Factors Hindering Growth

MHK has been experiencing rising inflationary pressures, primarily in material, energy and transportation. Rising product development costs and labor shortages add to the woes. In second-quarter 2023, its growth trend was hindered by lower sales volume and higher inflation along with temporary plant shutdowns, negative price, mix and unfavorable net impact of foreign exchange. SG&A expenses expanded 360 bps year over year due to higher inflation than benefits received from acquisitions.

Ongoing inflationary pressures drive a change in consumer discretionary spending while higher interest rates have moderated demand for homes, which is impacting housing sales. MHK expects continued pressure on pricing and mix along with seasonally soft demand patterns in third-quarter 2023. The company expects third-quarter adjusted earnings to be $2.62-$2.72 per share, excluding restructuring, acquisition and other charges. This indicates a significant decline from the year-ago figure of $3.34 per share.

Key Picks

Some better-ranked stocks from the Consumer Discretionary sector are Royal Caribbean Cruises Ltd. (RCL - Free Report) , Live Nation Entertainment, Inc. (LYV - Free Report) and Strategic Education, Inc. (STRA - Free Report) .

Royal Caribbean presently sports a Zacks Rank #1 (Strong Buy). RCL has a trailing four-quarter earnings surprise of 28.5%, on average. The stock has surged 102.7% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for RCL’s 2023 sales and earnings per share (EPS) indicates growth of 54.5% and 180.3%, respectively, from the year-ago period’s levels.

Live Nation presently flaunts a Zacks Rank of 1. LYV has a trailing four-quarter earnings surprise of 34.6%, on average. The stock has declined 15% in the past year.

The Zacks Consensus Estimate for LYV’s 2023 sales and EPS suggests rises of 21% and 57.8%, respectively, from the year-ago period’s levels.

Strategic Education currently sports a Zacks Rank of 1. STRA has a trailing four-quarter earnings surprise of 12.1%, on average. Shares of the company have increased 16.1% in the past year.

The Zacks Consensus Estimate for STRA’s 2023 sales and EPS implies improvements of 4.9% and 27.9%, respectively, from the year-ago period’s levels.

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