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Masco's (MAS) Cost Saving Plans Bode Well, Fx Woes Stay

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On Oct 18, we issued an updated research report on home building company, Masco Corporation (MAS - Free Report) .

This Taylor, MI-based company, with a market cap of around $11.14 billion, has seen its shares rise roughly 18% so far this year as against a 4% increase for the S&P 500 over the same time frame.

Cost Cutting & Other Initiatives

Masco, one of the leading cabinet manufacturers in the U.S., operates through various divisions. Its popular brands include KraftMaid and Merillat cabinets, Delta and Hansgrohe faucets, Behr paint, and Milgard windows. Notably, Behr is its leading brand in the do-it-yourself market for architectural coatings.

Coming to financial results, the first two quarters of 2016 were marked by robust growth in earnings, revenues and margins as the company capitalized on the improving momentum in the repair and remodeling and new home construction industry. The company expects repair and remodeling and construction activity to continue to accelerate, which is expected to drive demand further in the second half.

Meanwhile, Masco has been working on major cost saving initiatives as well as asset divestitures of the less profitable business units. Its cost-cutting plans include business consolidation, system implementation, plant closure, branch closure, improvement in the global supply chain and headcount reduction.

These initiatives target company-wide annual savings through reduction of corporate expense and simplification of Masco’s organizational structure. The program has been driving the company’s margins over the past few quarters. Reflective of this, the company reported a 220 basis point of year-over-year improvement in its adjusted gross margin in the last reported quarter.

Also, Masco regularly divests less profitable and underperforming businesses to focus on core areas in a bid to accelerate growth and improve shareholder value. In Jun 2015, the company spun off its Installation and Other Services segment into an independent publicly traded company, TopBuild Corp, to simplify its product portfolio and focus on the growing home repair and remodeling market.

Currency & Other Headwinds

Adverse currency translations, despite being moderate than 2015 levels, remain a headwind. About 21% of Masco’s sales are generated outside the U.S. As such the company is subjected to adverse currency translation across the globe.

Again, a significant portion of Masco’s sales come from two customers – The Home Depot Inc. (HD - Free Report) and Lowe's Companies, Inc (LOW - Free Report) . The Home Depot, Masco’s largest customer, accounted for 33% of its consolidated net sales in 2015. On the other hand, Lowe's contributed around 10% to net sales. Following the spin-off of TopBuild in 2015, concentration of sales on these customers has increased. This may not prove favorable as loss of any of these customers may be damaging.

Zacks Rank & Key Pick

Masco currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the construction sector is Argan, Inc. sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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