Masco Beats Q2 Earnings on Strong Margins; Cabinets Lag - Analyst Blog

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Masco Corporation's ( MAS )  adjusted earnings of 32 cents per share in the second quarter of 2014 surpassed the Zacks Consensus Estimate of 28 cents by 14.3%. Earnings increased 39.0% year over year on the back of strong margins and revenue.

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Masco's net sales of $2.26 billion were in line with the Zacks Consensus Estimate. Revenues however grew 5.1% year over year owing to successful new products and program launches.

North American sales increased 4% year over year to $1.84 billion owing to an improvement in demand driven by new home construction. International sales rose 9% (2% in constant currency) to $417 million driven by an improvement in Europe and strong performance by international plumbing.

Strong Margins

Adjusted gross profit grew 8.5% to $661 million in the quarter. Gross margin improved 30 basis points (bps) to 29.2%.

Adjusted operating profit was $249 million in the quarter, up 20.9% from the prior-year quarter. Adjusted operating margin increased 140 bps year over year to 11.0% in the quarter, driven by increased operating leverage and solid gross margins. Operating margins rose 80 bps in North America to 11.8% and 160 bps in the international markets to 14.1%.

Segmental Analysis

Cabinets and Related Products: Segment revenues were $253 million in the quarter, down 5% year over year. Sales to dealers and builder channels increased in a mid single-digit range, which was offset by sales decline to home centers.

Operating loss of $8 million in the quarter compared unfavorably with operating profit of $2 million in the prior-year quarter due to costs associated with ERP implementation.

Plumbing Products: The segment recorded revenues of $849 million in the quarter, up 6% year over year driven by strong sales in all channels as well as international market. Segment sales were also driven by an improvement in the repair and remodel industry.

Adjusted operating margin of 16.4% improved 270 bps year over year driven by a positive mix-shift toward the trade channel and cost control and productivity improvements.

Installation and Other Services: Installation and Other Services segment revenues were $384 million in the quarter, up 8% year over year, driven largely by an increase in sales in the construction, commercial and distribution channels.

Adjusted segment operating profit of $18.0 million was up 125% year over year. Adjusted operating margin rose 250 bps to 4.7%, driven by better operating leverage.

Decorative Architectural Products: Decorative Architectural Products segment revenues increased 5% to $596 million, driven by successful product launches and programs, such as Behr Deckover, Behr Marquee Interior and Pro paint initiatives. Adjusted operating margin rose 40 bps to 19.0% driven by growth initiatives.

Other Specialty Products: Other Specialty Products segment revenues were $178 million in the quarter, up 11% year over year, driven by volume growth in the North American window business. Segment adjusted operating margin was 8.4%, down 40 bps, due to ERP expense and cost related to growth investment.

Financial Details

The company ended second-quarter 2014 with cash and cash investments (including short-term bank deposits) of $1.42 billion compared with $1.21 billion at the end of first-quarter 2014.

Outlook

Masco is positive that new home construction and repair and remodel activity will improve at a steady rate in 2014, which in turn will increase the demand for the company's products and services. The company however indicated that the cabinet segment will continue to remain soft in the upcoming quarters, as consumers continue to defer these expenses. The company expects mid teen margin improvement in the plumbing segment in the upcoming quarter.

Masco carries Zacks Rank #4 (Sell).

Investors interested in the building construction sector can also consider Quanex Building Products Corporation ( NX ), Simpson Manufacturing Co., Inc. ( SSD ) and United Rentals, Inc. ( URI ). All these companies hold a Zacks Rank #2 (Buy).


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



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: MAS , NX , URI , SSD



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