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Masco's (MAS) Shares Decline as Q1 Earnings Miss Estimates

Zacks Equity Research

Masco Corporation MAS reported first-quarter 2019 results, wherein earnings and revenues missed the Zacks Consensus Estimate. Also, both the top and bottom lines declined on a year-over-year basis. Consequently, shares of this leading home improvement and building products manufacturer moved 2.5% south in the pre-market trading session, following the company’s earnings release at the time of writing.

The downside was mainly attributable to inventory rebalancing by a few customers, lower volume and softness in certain markets.

Let’s Unveil the Picture

Masco’s adjusted earnings of 44 cents per share lagged the consensus mark of 47 cents by 6.4%. Also, total net sales of $1,908 million missed analysts’ expectation of $2,007 million by 4.9%.

Masco Corporation Price, Consensus and EPS Surprise

Masco Corporation Price, Consensus and EPS Surprise | Masco Corporation Quote

On a year-over-year basis, adjusted earnings and net sales decreased 2.2% and 0.6%, respectively. Also, net sales (excluding acquisitions and currency) fell 2% from the prior-year quarter.

Moreover, North American sales (in local currency) declined 2% and international sales were down 1% year over year.

Margins Performance

Adjusted gross profit grew 4.2% from the prior-year quarter to $599 million. However, adjusted gross margin declined 120 basis points (bps) to 31.4% compared with 32.6% recorded in the prior year.

Selling, general and administrative expenses, as a percentage of net sales, were 19.5%, in line with the prior-year period. However, adjusted selling, general and administrative expenses contracted 20 bps to 19.3%.

Adjusted operating profit decreased 8% from the prior-year quarter to $230 million. Adjusted operating margin came in at 12.1%, contracting 90 bps.

Segmental Analysis

Plumbing Products: The segment’s net sales of $940 million slipped 3% year over year in the quarter. Excluding the impact of foreign currency translation, sales remained flat from a year ago. The tepid performance was due to lower volume and unfavorable mix.

Adjusted operating margin declined 60 bps year over year to 16.3%. Adjusted EBITDA of $172 million also decreased 5.5% year over year.

Decorative Architectural Products: Segmental sales totaled $573 million, up 5% on a year-over-year basis. However, excluding the impact of the Kichler acquisition, the metric decreased 7% from the prior-year quarter. The downside is mainly attributable to sales of paints and other coating products pulled forward to fourth-quarter 2018, softness in end-market demand and channel inventory rebalancing.

Adjusted operating margin fell 290 bps to 14.3%. Adjusted EBITDA decreased 7% from the year-ago period to $92 million.

Cabinets and Related Products: Segmental sales totaled $237 million, which increased 9% year over year. The improvement was backed by growth in the repair and remodel, and new construction businesses.

Adjusted operating margin increased an impressive 650 bps to 9.3%. Also, EBITDA jumped significantly to $25 million from the prior-year figure of $9 million.

Windows and Other Specialty Products: Net sales in the segment amounted to $158 million, reflecting a fall of 16% year over year, primarily due to reduced volume in North America (resulting from an ERP implementation) and continued softness in the U.K. market.

Adjusted operating margin came in at a negative of 1.9% in the quarter, contracting 400 bps year over year. Adjusted EBITDA also declined 70% from the year-ago quarter to $3 million.

Financials

As of Mar 31, 2019, cash and cash investments were $316 million, decreasing from $559 million recorded in the comparable period of 2018. Net cash used in operating activities was $131 million in the quarter compared with $55 million a year ago.

The company repurchased 3.5 million shares, and returned approximately $157 million to its shareholders through share repurchases and dividends during the quarter.

2019 View Reaffirmed

Masco remains confident to drive profitability in the remainder of the year, given recovering sales trends. The company projects 2019 earnings within $2.52-$2.72 per share. Also, it anticipates adjusted earnings in the range of $2.60-$2.80 per share.

Zacks Rank & Stocks to Consider

Masco currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector include PotlatchDeltic Corporation PCH, Trex Company, Inc. TREX and PulteGroup, Inc. PHM, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PotlatchDeltic has a strong earnings surprise history, having surpassed the Zacks Consensus Estimate in three of the last four quarters, with the average positive surprise being 17.1%.

Trex and PulteGroup has a solid record of earnings surprises, having surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average being 11.2% and 13.5%, respectively.

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