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Will Mohawk's Portfolio Expansion Strategy Combat Cost Woes?

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Mohawk Industries, Inc. (MHK - Free Report) is strengthening its market share on solid portfolio expansion strategy, given notable acquisitions and cost-saving initiatives.

Shares of this leading global manufacturer of flooring product have outperformed its industry in the year-to-date period. The stock has gained 24.4% compared with its industry’s 20.5% growth in the said period. The upside was mainly driven by the company’s dominant market share in the highly fragmented and competitive industry.

Rising raw material prices, increased transportation and energy costs, as well as constrained chemical supply are denting its bottom-line performance. Also, stronger dollar and substitution of LVT to other alternatives added to the distress.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Key Growth drivers

Mohawk enjoys a dominant market share in the highly competitive and fragmented industry on a worldwide basis. The company holds a competitive advantage over peers, particularly in the Laminate and Wood segment, backed by industry-leading design, patented technologies and brands.

It makes substantial investments to boost capacity and enter new markets. In this regard, the company marked its biggest investment in the 2017-2018 time frame with the expansion of LVT in the United States and Europe; ceramic capacity increases in the United States, Mexico, Italy, Poland, Bulgaria and Russia; luxury laminate in the United States, Europe and Russia; carpet tile in Europe; sheet vinyl in Russia; countertops in the United States and Europe; and carpet and rugs in the United States.

In 2018, it invested approximately $790 million in capital projects to increase capacities, differentiate products and improve productivity. Notably, the company intends to invest an additional $550-580 million in 2019 to complete these projects and commence new initiatives.

Again, to bolster the company’s strong presence across the world, it keeps on investing in new businesses to expand its geographic footprint and market share.

On Jan 31, 2019, Mohawk acquired a Netherlands-based hard surface flooring distribution company within the Flooring Rest of the World (“Flooring ROW”) segment. Also, in 2018, it purchased leading flooring companies in Australia, New Zealand and Brazil.

Notably, during the first quarter, acquisitions in the Flooring Rest of the World segment added 12% to total revenues.

Causes of Concern

Mohawk’s operating backdrop remained tough throughout 2018 and in first-quarter 2019 due to increasing material costs, mounting transportation and energy expenses, along with constrained chemical supply. Although the company implemented several initiatives to offset increased costs, continuous inflation, competitive imports due to a stronger dollar and substitution of LVT to other alternatives hindered the positives. In first-quarter 2019, gross margin contracted 270 basis points due to the above-mentioned headwinds.

In the first quarter, Mohawk’s adjusted earnings and operating margins declined significantly due to the above-mentioned headwinds. Moreover, second-quarter 2019 EPS, excluding one-time charges, is expected within $2.81-$2.91, comparing unfavorably with $3.51 per share reported in the year-ago period. Although it continues to introduce innovative collections, implement price increases and improve manufacturing processes, the above-mentioned headwinds are likely to prevail in upcoming quarters as well.

Stocks to Consider

Some better-ranked stocks in the Zacks Consumer Discretionary sector are Strategic Education Inc. (STRA - Free Report) , Bright Horizons Family Solutions Inc. (BFAM - Free Report) and Grand Canyon Education, Inc. (LOPE - Free Report) . While Strategic Education sports a Zacks Rank #1 (Strong Buy), Bright Horizons and Grand Canyon carry a Zacks Rank #2 (Buy). You can also see the complete list of today’s Zacks #1 Rank stocks here.

Strategic Education’s earnings for the current year are expected to increase 36.2%.

Bright Horizons surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with average positive earnings surprise of 3%.

Grand Canyon is expected to record an earnings growth rate of 16% in long term.

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