On Mar 31, we issued an updated research report on Mohawk Industries, Inc. (MHK - Free Report) , one of the leading global manufacturers of flooring products that enhance residential and commercial space.
Mohawk’s leading position in the home furnishings industry and its strategic acquisitions are encouraging. However, currency headwinds hurt sales and are expected to keep revenues under pressure in the near term.
Solid Housing Market Outlook to Benefit
Overall fundamentals of the housing market remained positive through 2016 and also showed some meaningful improvement in recent times. Steady job and wage growth, a recovering economy, moderate gains in home price, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory, all point to strong demand in 2017.
Mohawk has heavy exposure to the U.S. residential sector. The company’s revenues are expected to increase with the gradual recovery in the housing market and improvement in consumer spending. This would in turn increase demand for flooring in both commercial and residential markets.
Mohawk enjoys the leading position in the home furnishings industry and is one of the largest flooring manufacturers in the global market. The company enjoys an enviable market share in the hugely fragmented and competitive industry. Additionally, the company commands a competitive advantage in the laminate flooring channel backed by the Laminate and Wood segment’s industry leading design, patented technologies and brands.
Mohawk is increasing its investments to boost capacity and enter new markets. The company is also adding unique capabilities to introduce differentiated products and expects higher productivity improvement in the days ahead.
Importantly, Mohawk follows a systematic inorganic approach for growth. Acquisitions play an important role in the company’s growth strategy. In Jan 2017, the company entered into an agreement to acquire Emilceramica, a ceramic tile company in Italy. The business recorded roughly $160 million sales in 2016, with an EBITDA margin of about 19%. The transaction is anticipated to close in the second quarter of 2017. With this takeover, Mohawk will be able to expand its presence in the European market.
Currency Headwinds Pose Threats
Mohawk generates almost one-third of its revenues from customers outside the U.S. Currency headwinds hurt sales in 2016 by $69 million and in 2015 by $490 million. Though the unfavorable currency impact has lessened in 2016, and is expected to improve through the rest of 2017, the net impact of currency headwinds still remains significant.
Again, the flooring industry is highly competitive with a number of players (large and small), including imports, offering products in the marketplace. The company needs to make significant investments on new products, distribution network and manufacturing facilities that could impact profitability.
Mohawk’s shares have gained 14.6% year to date, outperforming 13.2% growth of the Zacks categorized Textile-Home Furnishing industry. Mohawk’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters. Estimates for the current year and the next have moved north by 0.6% and 2%, respectively, over the last 60 days. Given its solid fundamentals, the stock is positioned to perform well in the quarters ahead.
Zacks Rank & Key Picks
Mohawk Industries carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader consumer discretionary sector include Care.com, Inc. , SP Plus Corporation (SP - Free Report) and Weight Watchers International, Inc. , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Care.com’s earnings are expected to increase 950% in the current year, 18.9% for SP Plus and 29.4% for Weight Watchers.
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