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Factors Setting the Tone for Masco (MAS) in Q2 Earnings

Zacks Equity Research

Masco Corporation MAS is expected to report second-quarter 2019 results on Jul 25, before the opening bell.

In the last reported quarter, its earnings and revenues lagged the Zacks Consensus Estimate by 6.4% and 4.8%, respectively. Also, on a year-over-year basis, the top and bottom lines declined 0.6% and 2.2%, respectively. In fact, the company’s earnings missed the consensus mark in five of the trailing seven quarters.

Softness in certain markets served, inventory rebalancing by a few customers and lower volume are pressing concerns.

Which Way are Estimates Trending?

For the quarter to be reported, the Zacks Consensus Estimate for earnings is pegged at 81 cents per share, remaining unchanged over the past 60 days. This indicates a gain of 8% from 75 cents per share reported in the year-ago quarter. Revenues are expected to be $2.35 billion, up 2.2% year over year.

 

Masco Corporation Price and EPS Surprise

 

Masco Corporation Price and EPS Surprise

Masco Corporation price-eps-surprise | Masco Corporation Quote

Factors That Might Influence Upcoming Quarterly Results

Lower volume, softness in end-markets served and tariff-related woes are expected to hurt Masco’s second-quarter results. Nonetheless, its strength in repair and remodeling activity, portfolio expansion strategy, along with cost-saving initiatives are likely to offset the above-mentioned headwinds in the to-be-reported quarter.

The company’s repair and modeling business has been a key growth driver, contributing a significant portion to total net sales. However, the business didn’t pay off much in the last reported quarter due to pulled-forward sales, a large ERP implementation in the windows business and softer end-market demand. The trend is expected to continue in the second quarter as well, considering the ongoing softness in the U.S. housing market.

Meanwhile, cost-saving initiatives, which target company-wide annual savings through reduction of corporate expense and simplification of Masco’s organizational structure, bode well for Masco. In the last reported quarter, selling, general and administrative expenses — as a percentage of net sales — were in line with the prior-year period, reflecting fruition of these initiatives.

Anticipated Segmental Performance

Masco’s Plumbing business (contributing more than 49% to revenues) is expected to benefit from Delta, courtesy of Brizo brand and showrooms, Peerless brand at retail, and strength across all channels of distribution including wholesale, retail as well as e-commerce. Strong pricing is expected to have aided the company’s plumbing segment during the quarter. However, the upside might be impacted by unfavorable currency headwinds and lower demand.

The Zacks Consensus Estimate for Plumbing Products revenues of $1.06 billion implies growth from $1.03 billion in the year-ago period.

Meanwhile, the Decorative Architectural Products segment is expected to benefit from Kichler Lighting and its propane initiative. The consensus mark for the segment’s revenues is currently pegged at $830 million, suggesting an increase from $806 million in the comparable prior-year period and $573 million in the last reported quarter.

Cabinetry Products’ revenues are expected to be $263 million, slightly below $268 million reported in the prior-year period but up from $237 million registered in the last reported quarter.

Costs High

Increase in commodity costs, higher depreciation expense, and ERP and logistics costs have been denting Masco’s margins. Also, lower volumes, unfavorable mix and increased cost from the acquisition of Kichler have been putting pressure on its bottom line. These factors are likely to impact earnings in the quarter to be reported.

For the Plumbing segment, the Zacks Consensus Estimate for adjusted EBITDA is currently pegged at $218 million, pointing to a nominal increase from $214 million reported in the prior year. Although the Plumbing business is expected to witness an upside, Decorative Architectural Products and Cabinetry Products’ adjusted EBITDA is likely to decline.

In Decorative Architectural Products, adjusted EBITDA for the to-be-reported quarter is projected at $166 million, down from $175 million a year ago. Adjusted EBITDA from Cabinetry Products is expected to be $27.03 million, implying a decline of $10 million from $37 million registered in the prior-year period.

Quantitative Model Prediction

Our proven model does not show that Masco is likely to beat earnings estimates in the to-be-reported quarter. This is because 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.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.82%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Masco currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Worth a Look

Here are a few stocks in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Louisiana-Pacific Corp. LPX has an Earnings ESP of +2.00% and carries a Zacks Rank #3.

Meritage Homes Corp. MTH has an Earnings ESP of +5.06% and a Zacks Rank #3.

KBR, Inc. KBR has an Earnings ESP of +5.66% and holds a Zacks Rank of 2.

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