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Factors Setting the Tone for Masco (MAS) in Q3 Earnings

Masco CorporationMAS is scheduled to report third-quarter 2018 results on Oct 30, before the opening bell. In the last reported quarter, the company's earnings missed the Zacks Consensus Estimate by 1.3%.

How are Estimates Faring?

Let's take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. For the quarter to be reported, the Zacks Consensus Estimate is pegged at 70 cents, trending downward from 71 cents over the past 30 days. Nonetheless, this reflects a gain of 40% from 50 cents reported in the year-ago quarter. Revenues are expected to be $2.17 billion, up 12.1% year over year.

Masco Corporation Price and EPS Surprise

Masco Corporation Price and EPS Surprise | Masco Corporation Quote

Factors That Might Influence Q3 Results

Masco's third-quarter 2018 results are likely to be driven by higher sales, backed by volume growth and pricing actions. The company has been experiencing strong demand for its industry-leading repair and remodeling products across all channels of distribution and price points. Notably, Masco's repair and model business has been a key growth driver, contributing 84% to its sales. The business has been performing well and the trend is likely to continue in the to-be-reported quarter as well, given solid housing fundamentals.

Additionally, Masco continues to expand its portfolio via acquisitions. In the first quarter, the company completed the acquisition of Kichler Lighting. Through the deal, it aims to expand in the fragmented $6-billion U.S. residential lighting industry. This will likely aid the company's top line in the third quarter as well.

It has been undertaking strategic growth investments that will continue in the third quarter as well. Masco had earlier projected that these investments will diminish in the third and fourth quarter, leading to a stronger second half of 2018.

Segment Performance

Coming to the different reportable segments, Plumbing Products, comprising about 44.9% of the total revenues, is expected to contribute substantially to overall growth. The Zacks Consensus Estimate for Plumbing Products revenues of $1,013 million reflects a growth from $951 million in the year-ago period but a decline from $1,032 million in the second quarter.

The Cabinets segment (contributing 11.7% to total sales) is expected to increase 3.1% year over year but decrease 11.9% sequentially to $236 million.

Decorative Architectural Products is expected to grow 29.1% year over year but decrease 11.4% sequentially in the third quarter. Revenues at Windows and Other Specialty Products are expected to inch up 1.5% year over year and 7.9% sequentially. The Window segment is expected to witness market softness in the U.K. The combination of a significant reduction of workforce in its business in the UK and some warranty expense in the Milgard business in the United States have impacted the company's second-quarter results. It expects to witness about $5 million impact from these headwinds in the third quarter as well.

Higher Costs a Woe

Masco's adjusted gross and operating margins contracted 250 basis points (bps) and 150 bps, respectively, in the second quarter of 2018. Strategic growth investments, ERP costs and a lag in the price/cost led to the decline. The company is experiencing cost pressure, given higher raw materials for paint, which is likely to have an impact on the second half of 2018.

Overall, acquisitions & divestitures - increasing the demand for repair and remodeling, as well as product launches - are expected to drive sales growth of the company. However, higher material costs raise a concern.

Quantitative Model Prediction

Our proven model does not show that Masco is likely to beat earnings estimates in the to-be-reported quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

You may uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

The company has an Earnings ESP of -0.95% and a Zacks Rank #4 (Sell), which does not make us confident of an earnings beat. It is to be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Notably, the stock surpassed the Zacks Consensus Estimate in only one of the trailing four quarters, recording an average negative surprise of 3.2%.

Stocks With Favorable Combination

Here are some construction companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming releases:

Rayonier Inc. RYN has an Earnings ESP of +16.7% and a Zacks Rank #3. The company is slated to report quarterly results on Oct 31. You can see the complete list of today's Zacks #1 Rank stocks here .

Century Communities, Inc. CCS has an Earnings ESP of +3.74% and holds a Zacks Rank #3. The company is scheduled to report quarterly results on Nov 6.

AECOM ACM has an Earnings ESP of +0.24% and a Zacks Rank #3. The company is scheduled to report quarterly results on Nov 12.

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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 Nasdaq, Inc.


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

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