Masco (MAS) Strong on Acquisitions, Cost Burden Hurts

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Masco CorporationMAS is riding high on strategic acquisitions & divestures, value-building techniques, as well as cost-cutting initiatives. Resultantly, Masco's shares have gained 4.4% in the past three months against its industry 's decline of 5.4%. However, expenses related to product launches and raw material costs raise concern for this Zacks Rank #3 (Hold) company.

Recently, Masco reported mixed results in the second quarter of 2018, wherein revenues surpassed the Zacks Consensus Estimate but earnings missed the same. That said, earnings and revenues increased 21% and 11% year over year, respectively, driven by strong performance in the Plumbing, Decorative Architectural and Cabinetry Products business.

Key Growth Drivers

Masco is enhancing its product portfolio through acquisitions and divestures. The company is enthusiastic about the future prospect of expansion and margin growth. On Mar 9, 2018, the company acquired Kichler Lighting. The acquisition will complement Masco's product line.

Through the deal, the company aims to expand in the fragmented $6-billion U.S. residential lighting industry. Apart from buyouts, the company regularly divests the less profitable and underperforming businesses to focus on its core areas, in a bid to accelerate growth and improve shareholder value.

Moreover, the company intends to drive shareholder value through reinvestment, right-fit acquisitions, as well as share repurchase program and dividend distribution. Masco returned $460 million to its shareholders through repurchases and dividends in 2017, following which the company bought back 3 million shares for $115 million. This brings the year-to-date share repurchase total to $265 million (as of Jun 30, 2018) and it intends to deploy approximately $200 million for repurchases or acquisitions in the second half of 2018.

Masco's cost-cutting initiatives help boost profits through business consolidations, system implementations, plant & branch closures, improvement in the global supply chain and headcount reductions. These initiatives will target company-wide annual savings through business expense reduction and simplification of its organizational structure. Although the company has been witnessing depressing margin performances, it remains structured to optimize corporate demand for driving strong growth and margin expansion in the second half of 2018.

Higher Costs Raise Concern

Although Masco's cost-saving initiatives have been helping the company to boost profitability, rising cost burden has been pressurizing its margins.

In the second quarter, Masco's adjusted gross and operating margins contracted 250 basis points (bps) and 150 bps, respectively, due to strategic growth investments, ERP costs, and a lag in price/cost. Raw material costs and expenses related to new product launches are hurting Masco's margins and profits. Masco purchases several raw materials to manufacture its products. Fluctuations in the prices and availability of these raw materials might increase the cost of production.

Currently, the company is facing some pressure in resin-related costs. Also, copper and zinc prices have both gone up. Apart from raw material costs, it is also bearing expenses related to new product launches. If Masco is unable to offset these costs through price rise or supply chain initiatives, the performance of the company might be affected.

Stocks to Consider

Some better-ranked stocks in the industry include Continental Building Products, Inc. CBPX , NCI Building Systems, Inc. NCS and PGT Innovations, Inc. PGTI , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Continental Building's earnings for 2018 are expected to increase 50.4%.

NCI is expected to record 77.5% earnings growth in fiscal 2018.

PGT Innovations' 2018 earnings are expected to grow 78.7%.

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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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