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Masco's (MAS) Long-Term Views Look Good, Soft Demand Ails

·7 min read

Masco Corporation MAS has been gaining strength from its market-leading brands. Also, inorganic and cost-saving moves have been adding to the positives. Impressive balance sheet position are adding to the bliss.

However, intense inflationary pressure, supply chain woes, and slowing housing demand are hurting the company. Also, foreign currency impacts are denting profitability.

Shares of Masco have declined 4% in the past six months compared with the Zacks Building Products – Miscellaneous industry's 6.1% fall. Earnings estimates for 2022 have moved down in the past 30 days, depicting analysts’ concern over the company’s growth potential.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Let’s delve into this Zacks Rank #3 (Hold) company’s influencing factors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Driving Factors

Leading Brand Portfolio: Masco operates through various divisions with a large number of products. Its popular brands include Behr paint, Delta and Hansgrohe faucets, bath and shower fixtures, Kichler decorative and outdoor lighting, and Hot Spring spas. The Behr brand is the number one brand in the do-it-yourself or DIY market for architectural coatings. Delta continues to drive strong consumer demand across all its product categories and channels. To enhance its brand's commitment to distinctive design and innovative products, the Brizo brand recently introduced the Frank Lloyd Wright collection.

Strong Long-Term Prospect: Although slowing housing demand and other industry woes are prominent headwinds for Masco, it 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 in 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 11.6%.

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

In first-quarter 2021, Masco acquired a 75.1% equity interest in Easy Sanitary Solutions B.V. ("ESS"). ESS is a manufacturer of shower channel drains and offers a wide range of products for barrier-free showering and bathroom wall niches. Included in the Plumbing Products segment, ESS mainly focuses on innovation and design. The buyout expands Masco’s presence in the sanitary solutions business.

Moreover, 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 Huppe GmbH business, a manufacturer of shower enclosures and shower trays, from the Plumbing Products segment.

Cost-Saving Moves: Masco’s cost-saving initiatives 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 by reducing corporate expenses and simplifying its organizational structure. Masco remains well positioned to capitalize on the robust demand to drive strong growth and margin expansion in the near future. Selling, general and administrative expenses — as a percentage of net sales — declined 90 bps in the second quarter due to operating leverage and continued cost discipline across the businesses.

Strong Liquidity: Masco’s balance sheet remains strong, with net debt to EBITDA of 1.9X. It ended the second quarter with approximately $1.44 billion of balance sheet liquidity, including cash & cash investments of $440 million. As of Jun 30, 2022, its long-term debt was $2.946 billion, a slight decline from 2021-end. The company has enough liquidity to meet short-term obligations of $508 million.

The company repurchased 10.4 million shares for $550 million shares during the second quarter. It repurchased approximately $914 million of the stock so far and does not expect further repurchase this year. To fund the repurchase program, the company has undertaken a $500 million one-year term loan from a group of banks. Also, it extended the maturity of its $1 billion revolving credit facility by three years to April of 2027.

Factors Denting Profitability

Inflationary Pressures: Masco and the other 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’ second-quarter adjusted gross and operating margins contracted 330 bps and 250 bps from the year-ago period’s levels, respectively. Adjusted EBITDA also fell 4.9% year over year.

The company expects double-digit cost inflation for 2022, as freight, metals and paint input costs continue to face upward pressure. In fact, rising interest rates and inflation will moderate sales growth in the coming quarters. 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 that may adversely affect profits.

Tepid Outlook: Masco witnessed slowness in demand for many of its products during the second quarter. Across most categories, it expects volumes to be down modestly in the second half of 2022.

Given moderating housing demand and foreign currency headwinds, Masco has narrowed its 2022 guidance. It now expects sales growth in the range of 5-7% versus the previous projection of 6-10%, due to approximately 2% FX woes. The Plumbing segment’s sales growth is likely to be in the range of 3-5%, including a 3% impact from foreign currency, versus previous guidance of 3-7%. The Decorative Architectural segment’s sales are expected to grow 9-11% versus its previous projection of 10-14%.

Due to lower sales volume and higher supply chain costs, it now anticipates the overall operating margin to be approximately 17%, down from the prior projection of 17-17.5% and 2021 level of 17.4%. Of this, Plumbing margins will be approximately 18%, lower than previous guidance of 18.5-19% and 2021 level of 18.1%, due to higher supply chain inefficiencies and slightly lower volume assumptions. Decorative Architectural margins are estimated to be approximately 18%, down from 19.4% recorded in 2021.

The company narrowed its 2022 adjusted earnings guidance to $4.15-$4.25 per share from its previous expectation of $4.15-$4.35.

Currency Woes: Masco is exposed to risks from unfavorable movement in foreign currencies like euro, 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 the first half of 2022, currency impacted net sales by almost 2% and reduced operating margin.

A Brief Overview of the Other Stocks

TopBuild currently carries a Zacks Rank #3. 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 benefitting 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 rise 44% in 2022.

Installed Building also carries a Zacks Rank #2 (Buy). 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 2022 are expected to rise 50.4%.

Simpson currently carries a Zacks Rank #3. The company designs, engineers and manufactures high-quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels. It has been benefitting from product price increases and key growth initiatives.

Simpson’s earnings for 2022 are expected to rise 20.1%.


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