Mohawk's Inorganic Drive Impresses, Raw Material Costs Hurt

Zacks Equity Research
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On Jun 5, 2017, we issued an updated research report on Mohawk Industries, Inc. MHK, a leading global manufacturer of flooring products that enhance residential and commercial space.

Since the beginning of the year, Mohawk’s shares have gained 19.9%, outperforming the Zacks categorized Textile-Home Furnishing industry's growth of 18.8%. Mohawk’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters. Estimates have also trended upward for this year and 2018 in the last 60 days. Given its solid fundamentals, the stock is positioned well to perform in the quarters ahead.



Bolt-on Acquisitions, Solid Housing Fundamental Bode Well

The company enjoys a dominant market share in the hugely fragmented and competitive industry. Additionally, the company commands a competitive advantage in the laminate flooring channel backed by the Laminate and Wood segment’s industry leading design, patented technologies and brands.

Moreover, an opportunistic approach to acquisitions is an important part of Mohawk’s growth strategy. These acquisitions have enhanced Mohawk’s product portfolio and expanded its geographic footprint and market share.

Between 2013 and 2015, Mohawk invested $4.8 billion as capital expenditures and in acquisitions, increasing the company’s sales and operating income at a compounded rate of 12% and 38%, respectively, over the period. The company did not make any acquisitions in 2016, while in 2015 it spent $1,371 million.

Year-to-date, the company has made four acquisitions, with one expected to be completed in the second quarter of this year. Mohawk entered the European carpet tile and countertop market as well as the Russian sheet vinyl business. In April, Mohawk completed the acquisition of two small ceramic manufacturers in Europe and a carpet nylon polymerization plant in the U.S. The company had plans of completing the acquisition of a mine for its U.S. ceramic operations in May.

Apart from its inorganic drive, Mohawk is also introducing distinctive collections to boost sales. It is aggressively implementing productivity improvements across all businesses and bringing new capacity online to support growth.

Meanwhile, overall fundamentals of the housing market remained positive through 2016 and also showed some meaningful improvement in recent times. A recovering economy, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory – all point to continually strong demand in 2017.

As Mohawk has heavy exposure to the U.S. residential sector and its revenues are expected to increase with gradual recovery in the housing market, improvement in consumer spending patterns and increased demand for flooring in both commercial and residential markets.

Headwinds

Mohawk generates almost one-third of its revenues from customers outside the U.S. Currency headwinds hurt sales in 2016 by $69 million and in 2015 by $490 million. Though the unfavorable currency impact has lessened, and is expected to improve through the rest of 2017, the net impact of currency headwinds still remains significant.

Again, raw material inflation is a cause of concern for Mohawk. It is likely to put pressure on second-quarter results. However, the company stated that price increases should offset this in the second half of 2017.

Zacks Rank & Stocks to Consider

Mohawk Industries carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader consumer discretionary sector include The Dixie Group, Inc. DXYN, Johnson Outdoors Inc. JOUT and Sturm, Ruger & Company, Inc. RGR, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings for Dixie Group and Johnson Outdoors are expected to increase 156% and 37.7%, respectively, in the current year.

Estimates for Sturm, Ruger moved up by 9.8% and 5.7% for 2017 and 2018, respectively, in the last 30 days.

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