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Masco Banks on Repair & Remodeling Business Amid High Costs

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Masco Corporation’s MAS shares have improved 7.3% in the past six months compared with the industry’s growth of 3.1%. The company’s business has been benefiting from solid repair and remodel industry, inorganic efforts, cost-saving initiatives, along with strong housing fundamentals.

Also, divesture of less profitable and underperforming businesses to focus on core areas in a bid to accelerate growth and improve shareholder value bodes well. Recently, the company reported better-than-expected earnings in fourth-quarter 2019 and provided strong 2020 view.

However, net sales have been declining over the last four quarters due to lower volume and softness in certain markets served. Also, margins remained under pressure primarily due to higher costs and tariffs.

Let’s delve deeper into factors substantiating its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Growth Drivers

Masco’s Plumbing and Decorative Architectural Products are sold to residential repair and remodel markets, which contributed approximately 90% to 2019 revenues. Repair and remodel spending, as well as household formations steadily increased throughout 2018, courtesy of the millennial demography. This trend is expected to continue in 2020 and beyond, given strong end-market demand.

Masco focuses on inorganic strategies to expand presence and diversify portfolio. The acquisition of Kichler Lighting in 2018 had expanded its footprint in the fragmented $6-billion U.S. residential lighting industry. Notably, Kichler Lighting is a leading provider of decorative residential and commercial lighting products, ceiling fans, as well as LED lighting systems.

The company initiated the divesture of less profitable and underperforming businesses — UK Window Group ("UKWG"), Milgard Windows and Doors business ("Milgard") and Masco Cabinetry LLC ("Cabinetry") — to accelerate growth and improve shareholders’ value. By the end of fourth-quarter 2019, Masco completed the divesture of UKWG and Milgard. On Feb 18, 2020, it announced the completion of the divesture of Cabinetry business.

We expect the divesture strategy to bode well for the company as it will remove cyclicality and lower-margin businesses. This move will also drive liquidity, and enable the company to strengthen the product portfolio and boost better-performing businesses.

In 2019, Masco reported adjusted earnings of $2.25 per share, up 5.6% year over year. Net sales also grew marginally from a year ago.

In addition, the company is highly focused on driving its shareholders’ value through share repurchases and dividends. Masco returned 20.1 million shares for approximately $896 million to its shareholders through repurchases in 2019. Also, it increased quarterly dividend by 12.5% to 13.5 cents per share in third-quarter 2019.

Major Concerns

Despite witnessing improved repair and remodel end-market demand, Masco’s top line is suffering from inventory rebalancing by a few customers, lower volume, unfavorable mix, and softness in certain international markets served.

Increased tariffs, which raised the cost of certain materials over the last few quarters, and higher variable costs are denting its margins. In 2019, Masco’s adjusted gross and operating margins contracted 20 basis points (bps) and 40 bps, respectively due to increase in commodity and variable costs, along with higher tariffs.

The company anticipates tariff impact to be the strongest in first-half 2020, owing to which Plumbing margins are likely to fall 100 bps during the said period. Volume loss in Decorative Architectural Products and tariffs woes are projected to impact the segment’s operating margins by 300 bps in first-quarter 2020.

Masco — which shares space with Arcosa, Inc. (ACA - Free Report) , TopBuild Corp. (BLD - Free Report) and Construction Partners, Inc. (ROAD - Free Report) in the same industry — is overly priced in terms of valuation. Currently, its trailing 12-month price to earnings ratio is 17.07, which is higher than the industry’s 14.89. This implies that the stock is overvalued than its peers. VGM Score helps to identify stocks that have the most attractive value, growth and momentum characteristics. Masco has a VGM Score of C, indicating that the stock is most likely to underperform in the near future.

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