In real estate, what matters is location. When you're the
world's largest flooring company, your success rather hinges on
how you position your business in various markets and economic
Mohawk Industries (
) seems to have figured out the right formula. The Calhoun,
Ga.-based maker of floor covering products, such as carpets,
tile, wood and laminate, has expanded its global footprint via
three recent acquisitions. And it's poised to take advantage of
the long-awaited recovery in the U.S. repair and remodel
The company bought Marazzi, Pergo and Spano earlier this year.
Synergies of $85 million are expected to be realized within 18
months following the acquisitions. These companies also
significantly expand Mohawk's market share in the ceramic tile
segment and in Europe. It is now the world's largest manufacturer
of ceramic tile and second-largest maker of carpet.
"They've transitioned from a U.S. residential carpet
manufacturer to a global, multiple-category leader in the
flooring business (over the past several years)," said David
MacGregor, analyst at Longbow Research. "They've done it in a way
that has allowed them to remain in step with changing consumer
preferences. That's really important.
"Hard surfaces are growing three to four times the rate of
growth in soft surfaces. In other words, people aren't using
carpet as much anymore as they are putting in hardwood flooring,
ceramic tile, vinyl or laminate."
Taking into account recent acquisitions, 38% of Mohawk's 2012
pro forma revenue came from carpet, 37% from ceramic and 25% from
laminate and wood.
This translates into a 43% contribution to operating profit
for the ceramic segment, 29% for carpet and 28% for laminate and
wood, J.P. Morgan estimates in a recent report.
The Marazzi acquisition increased Mohawk's U.S. ceramic tile
market share by 10% to 42% . It also added robust positions in
Russia and Western Europe for Mohawk. Analysts expect $35 million
in synergies as the company is cutting costs in Europe and
bringing some of the manufacturing in-house.
In combining the advantages of the three acquisitions, Keith
Hughes, analyst at SunTrust Robinson Humphrey, noted: "There is
pretty significant overlap in terms of manufacturing and
distribution amongst the acquired businesses and Mohawk's current
"Specifically in the Marazzi transaction, it got them exposure
in Russia, where they have been growing organically in the last
couple of years," he added.
The Pergo buyout has opened up the market for laminates. It is
expected to produce about $27 million in synergies. The company
is closing plants in Sweden and instead will be manufacturing in
its existing facility in Belgium. It is also streamlining its
U.S. manufacturing and bringing more of its outsourced components
"Pergo is the most recognized brand globally in laminate
flooring," said MacGregor. "But it wasn't a very well managed
company. They weren't making very much money and had some
antiquated manufacturing facilities."
Finally, the Spano acquisition also expands Mohawk's laminate
and particle-board business and helps with the company's vertical
Repairs And Remodels
"All three should be accretive. All three contribute to a
stronger, global footprint in foreign categories that are growing
at a faster rate. They're more in step with all the consumer
preferences and also have higher margins," MacGregor noted.
About 50% of Mohawk's sales come from the repair and remodel
market in the U.S., which is finally showing signs of
"The stocks like Mohawk often get linked directly to the
new-home construction market, and that's important, but by far
their biggest end-user market in the residential world is
remodeling spending. And that has only recently, literally in the
second quarter, started getting some life under it," Hughes
New residential construction advances are poised to lift its
higher-margin ceramic tile business as well.
While integrating acquisitions can be a challenging task for
companies, analysts are very upbeat for Mohawk, pointing to
management's solid track record in that area.
"One of the reasons earnings should be accretive so quickly is
management is moving extremely quickly to integrate these
acquisitions and make the adjustments required," said MacGregor.
"It's much faster than you would normally find for a company
Mohawk's size, making acquisitions on the other side of the
CEO Jeffrey Lorberbaum and his family hold 25% of Mohawk's
equity resulting from the company's acquisition of their carpet
business, Aladdin Mills, in 1994. As a result, analysts say,
Lorberbaum manages Mohawk like a long-term shareholder.
"You've got a very hands-on CEO. That's a positive," said
MacGregor. "But also, he's disinclined to want to use equity in
acquisitions. Instead, he borrows money, uses that to fund the
acquisitions and then takes free cash flow to repay the debt. So
the banks really like him."
"Management team gets big, high marks for their execution,
particularly the cost cutting during what was a savage downturn,"
Analysts expect Mohawk to reduce its debt levels to target
levels by the end of 2014. "I think at that point Mohawk will
make more acquisitions," Hughes added.
Mohawk generated $7.84 per share in cash flow last year.
Earnings growth accelerated in the past five quarters from 20% to
61% in the most recent quarter.
"Cash flow is the engine that makes this thing run," said
Hughes. "There is not a tremendous amount of working capital you
have to invest in this business and the capex is reasonable, and
so they generate a significant amount of excess cash. So what
they've done historically, is they do acquisitions, borrow the
money, use a little bit of stock, use the cash flows for a period
of time to pay that debt back down. Then do it again."