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Masco's (MAS) Long-Term View Looks Good Despite Low Demand

Masco Corporation MAS has been banking on its market-leading brands, acquisition synergies and cost-saving moves. Notably, its solid long-term growth prospect amid slow housing demand is commendable.

However, intense inflationary pressure, supply-chain woes and unfavorable movement in foreign currencies are persistent headwinds.

Let’s delve into the influencing factors of this building products manufacturer.

Growth Driving Factors

Leading Brand Portfolio: Masco operates through various divisions with a large number of products. Its popular Behr brand is the number one brand in the do-it-yourself (DIY) market for architectural coatings. The PRO paint business within the Decorative Architectural segment continues to gain a significant share in the market. PRO, which accounts for one-third of its paint business, reported sales growth of more than 25% in 2022.

Impressively, PRO paint has a three-year run rate of approximately 70%. Recently, Masco launched adjacent paint categories like aerosols, interior stains and caulks and sealants within PRO that are expected to add benefits in 2023. Delta also continues to drive strong consumer demand across all its product categories and channels.

Solid Long-Term Growth Potential: Masco expects solid growth in the long run. Masco expects to generate 3-5% average annual sales growth organically. The acquisitions are likely to contribute 1-3% yearly to sales. It anticipates approximately 10% average annual EPS growth, backed by a strong operating margin, expansion through cost productivity and volume leverage.

This apart, it plans to return shareholders 1-2% above EPS growth via dividends and 2-4% through repurchases. The Zacks Consensus Estimate for long-term EPS growth is currently pegged at 4.9%.

Cost-Saving Moves: Masco mainly focuses on business consolidations, system implementations, plant closures, branch closures, improvements in the global supply chain and headcount reductions to improve profitability. These initiatives target company-wide annual savings by reducing corporate expenses and simplifying its organizational structure. Selling, general and administrative expenses — as a percentage of net sales — declined 90 bps in 2022, backed by operating leverage and continued cost discipline across the businesses.

Buyout Synergies: Masco believes in expanding its portfolio through acquisitions. In third-quarter 2021, the company’s Delta brand acquired a leading manufacturer of residential steam bath products, namely Steamist, Inc. This complements Masco’s strong trade and e-commerce product offerings.

Masco regularly divests its less profitable and underperforming businesses to focus on its core areas to accelerate growth and improve shareholder value. On May 31, 2021, it completed the divestiture of the Huppe GmbH business, a manufacturer of shower enclosures and shower trays, from the Plumbing Products segment.

Major Concerns

Lackluster View: Masco has been witnessing slowness in demand for many of its products since the second quarter of 2022, thanks to higher interest rates, inflation and tighter consumer spending. Given moderating housing demand and foreign currency headwinds, Masco provided lackluster guidance for 2023. It expects sales to decline by approximately 10%.

The Plumbing segment’s sales are likely to decline in the range of 10-14%, including the impact of foreign currency. The Decorative Architectural segment’s sales are expected to fall within the range of 5-10%. Particularly within paint, DIY sales are likely to decrease in high-single-digits and PRO sales are expected to decline in mid-single-digits.

Due to lower sales volume and higher operational costs, it anticipates adjusted operating margin to be approximately 15%, down from the 2022 level of 15.6%. Of this, the adjusted operating margin for Plumbing is expected to be approximately 16%, almost in line with the 2022 level of 15.9%. Lower volumes and higher operational costs (especially in the first quarter) will likely offset favorable selling price increases. Decorative Architectural adjusted operating margin is estimated to be approximately 16%, down 17.7% recorded in 2022 thanks to high inflation.

The company expects 2023 adjusted earnings to be within $3.10-$3.40 per share, down from $3.77 reported in 2022. Earnings estimates for 2023 have moved down to $3.29 per share from $3.46 in the past 30 days, depicting analysts’ concern over the company’s growth potential.

High Costs: Masco and Other Zacks Building Products – Miscellaneous industry players like TopBuild Corp. BLD, Installed Building Products, Inc. IBP and Simpson Manufacturing Co., Inc. SSD have been witnessing intense inflationary pressure over the last few quarters. Owing to supply chain constraints and higher commodity and freight costs, MAS’ 2022 adjusted gross and operating margins contracted 260 bps and 180 bps from the year-ago period’s levels, respectively. Adjusted EBITDA also fell 6.9% year over year.

Apart from raw material costs, the company bears expenses related to new product launches. If Masco cannot offset these costs through price increases or supply-chain initiatives, it may adversely affect profits.

Currency Woes: Masco is exposed to risks from unfavorable movement in foreign currencies like the euro, the renminbi, the Canadian dollar and the British pound sterling. Any economic unrest in countries served by Masco, especially North America, Europe and China, will adversely impact the company's export business. In 2022, currency impacts reduced net sales by almost 2% and reduced the operating margin.

A Brief Overview of the Other Stocks

TopBuild: This Daytona Beach, FL-based company is an installer and distributor of insulation and other building products to the U.S. construction industry. The company has been benefiting from increased sales volume, solid contribution from acquisitions and pricing at both businesses, defying the labor- and material-constrained market.

TopBuild’s earnings are expected to fall 11.7% in 2023.

Installed Building: The company is a leading installer of insulation and complementary building products. It primarily banks on a robust pipeline of acquisition opportunities across multiple geographies, products and end markets.

Installed Building’s earnings for 2023 are expected to decline 6%.

Simpson: The company designs, engineers and manufactures high-quality wood and concrete building construction products designed to make structures safer and more secure and perform at high levels. It has been benefiting from product price increases and key growth initiatives.

Simpson’s earnings for 2023 are expected to decrease by 16.8%.

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Masco Corporation (MAS) : Free Stock Analysis Report

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Installed Building Products, Inc. (IBP) : Free Stock Analysis Report

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