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Mohawk Industries (MHK) Up 3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Mohawk Industries (MHK - Free Report) . Shares have added about 3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Mohawk Industries due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Mohawk Beats on Q4 Earnings & Revenue Estimates

Mohawk Industries, Inc. reported fourth-quarter 2018 results, wherein adjusted earnings and sales beat the respective Zacks Consensus Estimate.

The company’s adjusted earnings per share (EPS) of $2.53 (excluding restructuring, acquisition and other charges) in the quarter topped the consensus mark of $2.49 by 1.6%. The bottom line, however, decreased 26% year over year.

Net sales of $2.45 billion surpassed analysts’ expectation by 0.3% and also increased 3% year over year, given higher contribution from Flooring Rest of the World segment. Further, net sales were up 5% on a constant-currency basis.

The fourth quarter had been a difficult period for Mohawk due to input cost inflation and softening market conditions for LVT. Meanwhile, the company executed price increases in many products in order to offset rising material costs. However, Mohawk’s businesses experienced more pressures on pricing and mix due to the price increase. During the quarter, the company reduced its manufacturing production to adapt to market demand.

Meanwhile, Mohawk experienced higher-than-expected start-up costs during the quarter, with slower-than-anticipated improvement in LVT production.

Operating Highlights

Adjusted gross profit of $663.5 million decreased 13.3% year over year. Gross margin of 26.4% (as reported) or 27.1% (excluding charges) was down from 32.3% a year ago. Inflation of $61 million, lower productivity of $24 million, higher start-up costs of $17 million, plant shutdowns of $15 million and unfavorable foreign exchange of $13 million offset increased volume and price mix of $18 million and $9 million, respectively.

Adjusted selling, general and administrative (SG&A) expenses increased 4.1% from the prior-year quarter to $422.7 million. As a percentage of total revenues, SG&A was 17.7% or 17.3% (excluding charges) compared with 17.1% in the year-ago period.

Adjusted operating income of $240.7 million declined 32.9% year over year. Operating margin of 9.8% (excluding charges) was down from 15.1% a year ago. Inflation headwinds of $62 million, along with the impact of increased start-up of $18 million, shutdown of $15 million and lower productivity of $23 million offset $9-million improvement in price mix.

Segment Details

Global Ceramic: Net sales at this segment amounted to $861.2 million, increasing 4.5% year over year on a reported basis and 7% on a constant-currency basis. Yet, the company’s operating margins were pressured by inflation, price and mix, along with lower production. This was partly offset by higher productivity.

Flooring North America: The segment’s net sales totaled $973.7 million, down 3% year over year. Operating margin of the segment was impacted by inflation, lower-than-expected volume, productivity and higher start-up costs.

Flooring Rest of the World: Net sales increased 12% year over year to $613.7 million. Moreover, sales improved 16% on a constant-currency basis. Operating margins also marked an improvement, attributable to improved volume and productivity that offset inflation, start-up costs, as well as foreign currency headwinds.

Financials

Cash and cash equivalents were $119.1 million versus $84.9 million at 2017-end. Mohawk exited the quarter with a long-term debt (less current portion) of $1.52 billion, down from $1.56 billion as of Dec 31, 2017.

2018 Highlights

Adjusted earnings came in at $12.33 per share in 2018 versus $13.61 a year ago. Net sales were $10 billion, reflecting an increase of 5% from 2017. Net sales grew 4% on a constant-currency basis.

2019 View

The company has a cautious stance for 2019, given slowing market conditions, oil volatility that is making its expenses unpredictable as well as pressing conditions in the housing markets in many regions. However, the company believes that the situation will improve going forward.

In the first quarter, Mohawk intends to reduce production rates due to softer demand in most of the markets served by the company. It continues to introduce innovative new collections, implement price increases and improve manufacturing processes. Taking all of this into account, EPS guidance for the first quarter of 2019 is expected within $2.02-$2.12, excluding one-time charges.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.25% due to these changes.

VGM Scores

Currently, Mohawk Industries has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Mohawk Industries has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.




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