Mohawk Industries, Inc. (MHK - Free Report) has been witnessing higher raw material and transportation costs of late. Despite being one of the largest flooring manufacturers in the global market and undertaking several strategic measures to drive growth, Mohawk’s shares have declined 55.1% in a year’s time compared with the industry’s fall of 58.2%.
Let’s delve deeper and try to identify the factors affecting this Zacks Rank #5 (Strong Sell) company’s growth potential.
Rising Input Cost Inflation: Despite executing additional pricing across most of its product categories, Mohawk is bearing the brunt of higher raw materials, labor, energy and fuel-related costs, which are dampening margins. In the third quarter of 2018, its adjusted gross profit declined 7.3% year over year. Notably, all its end markets were significantly impacted due to rising material cost inflation during the said quarter. Higher transportation costs and a stronger dollar further added to the woes.
Furthermore, Mohawk’s selling, general and administrative expenses grew 6.4%, while adjusted operating income declined 21% year over year. Weaker product mix, lower manufacturing and efficiency levels, along with higher depreciation and employee costs were the main factors pressurizing its margins.
Lower Guidance Raises Concern: The company’s overall performance during the third quarter was negatively impacted due to various operating costs and softer product mix. As a result, the company has projected its fourth quarter of 2018 adjusted earnings in the range of $2.45-$2.60 per share (versus $3.42 reported in the year-ago period).
Also, it expects overall fourth-quarter results to be softer on a sequential basis. Mohawk also expects sales to be slightly lower than the last reported quarter in most markets and product categories.
Downward Trends in Estimates: Due to lower-than-expected results in the third quarter and discouraging fourth-quarter view, the Zacks Consensus Estimate for 2018 and 2019 earnings has declined 10.1% and 23.5%, respectively, over the past 60 days.
Meanwhile, to combat the above-mentioned headwinds, the company plans to boost prices, expand in growing channels, introduce new products and foray into geographies. In the U.S. market, Mohawk expects to increase LVT production and sourcing, as LVT continues to gain market share. However, the stock is unlikely to recover very soon as the positive effects of these initiatives will take time to be realized.
Overvalued Compared to Peers: The company’s stretched valuation is another concern. Its trailing five-year price to earnings (P/E) ratio is 9.6, which is higher than the industry’s 9.2. This implies that the stock is overvalued compared to peers.
Stocks to Consider
Some better-ranked stocks in the Consumer-Discretionary sector are Adtalem Global Education Inc. (ATGE - Free Report) , Universal Technical Institute Inc. (UTI - Free Report) and Pool Corporation (POOL - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Adtalem, Universal Technical and Pool Corp’s expected current-year earnings growth rate is pegged at 2.5%, 30.5% and 41.1%, respectively.
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