Acquisitions Spur Growth In Flooring Giant


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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 environments.

Mohawk Industries ( MHK ) 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 market.

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."

Revenue Sources

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 operations.

"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 in-house.

"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 integration strategy.

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 improvement.

"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 said.

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 world."

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."

Good Execution

"Management team gets big, high marks for their execution, particularly the cost cutting during what was a savage downturn," said Hughes.

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."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas

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