Masco CorporationMAS is poised to gain from strategic acquisitions & divestures, healthy repair and remodel activity, as well as cost-cutting measures.
Undeniably, higher raw material and ERP costs, as well as logistics expenses pose significant threats to Masco's margins.
Although the ongoing headwinds have impacted the company's performance, as is evident from the stock's decline of 21.4% in the past six months, it has outperformed its industry in the said period. Meanwhile, earnings estimates have been upwardly revised over the past few weeks, suggesting that sentiments on Masco are moving in the right direction. The Zacks Consensus Estimate for the company's 2019 earnings has also moved up 0.4% over the past 30 days.
Masco has solid growth prospects, as is evident from the Zacks Consensus Estimate for 2018 earnings of $2.41 per share, which are expected to grow 24.2% year over year. Meanwhile, the company's earnings are expected to increase by a decent 12.8% in 2019 as well. Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A.
Key Growth Drivers
Masco is one of the leading cabinet manufacturers in the United States and holds one of the largest shares in faucets. Its popular brands include Behr paint, Delta and Hansgrohe faucets, bath and shower fixtures, KraftMaid and Merillat cabinets, Milgard windows and doors, Kichler decorative and outdoor lighting, and HotSpring spas. The Behr brand is the number one brand in the DIY market for architectural coatings. The company has been witnessing strong demand for its market-leading brands.
Meanwhile, the repair and remodel market fundamentals remain strong and are conducive to solid long-term growth. Notably, repair/remodel activity represents approximately 84% of its total sales. Home price appreciation, which has a strong correlation with repair and remodel spending, remains strong. Overall, the company is expected to benefit from strong growth in many of its product categories and solid economic fundamentals.
Masco continues to expand its portfolio via acquisitions. On Mar 9, 2018, the company acquired Kichler Lighting, a leading provider of decorative residential and commercial lighting products, ceiling fans as well as LED lighting systems. Through the deal, it aims to expand in the fragmented $6-billion U.S. residential lighting industry. The acquisition added $239 million to Masco's total net sales in the past nine months of 2018.
The company has been undertaking cost-saving initiatives that include business consolidations, system implementations, plant closures, branch closures, improvement in the global supply chain and headcount reductions. These initiatives target company-wide annual savings through reduction of corporate expense and simplification of Masco's organizational structure. Although it has been suffering from dismal margin performances, Masco remains well positioned to capitalize on the robust demand, in order to drive strong growth and margin expansion in the near future.
Higher Costs Raise Concern
Increasing raw material and logistics costs, along with tariff challenges remain pressing concerns for Masco. The company's adjusted gross margin contracted 110 basis points to 32.7% in the last reported quarter. Masco purchases several raw materials to manufacture its products. Fluctuation in the price and availability of these raw materials might increase the cost of production. Also, lower volumes in DIY coatings and international Plumbing businesses, along with modestly lower margin expectations for Cabinetry pose concerns.
That said, Masco, currently carrying a Zacks Rank #2 (Buy), continues to leverage its selling, general and administrative or SG&A expenses, and make strategic investments to drive profitable growth.
Other Stocks to Consider
Other top-ranked stocks from the same industry include United Rentals, Inc. URI , PGT Innovations, Inc. PGTI and Owens Corning Inc OC , each sporting a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
United Rentals' earnings for 2018 and 2019 are expected to increase 53.6% and 21.3%, respectively.
PGT Innovations and Owens Corning have an expected three-five year EPS growth rate of 19.9% and 13.5%, respectively.
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