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Strategic Acquisitions Bode Well for Masco, Costs Increase

Zacks Equity Research

Masco Corporation’s MAS inorganic moves, value-building techniques and cost-saving initiatives are key growth drivers. Meanwhile, shares of Masco have gained 35.1% in the past three months, outperforming its industry’s rally of 12.5%.

However, rising raw material costs and prevailing homebuilding headwinds raise concerns.

Let’s delve deeper into the factors substantiating its Zacks Rank #3 (Hold).

Key Growth Drivers

Masco, being one of the leading cabinet manufacturers in the United States, holds the highest share in faucets. The company’s value-building techniques depict strong demand for its market-leading brands. Notably, its Behr brand is the topmost brand for architectural coatings in the DIY market.

The company expands its product portfolio through various inorganic moves. In 2018, the company acquired Kichler Lighting in order to complement its product line and expand in the fragmented $6-billion U.S. residential lighting industry. The acquisition significantly contributed to sales growth of the Decorative Architectural Products segment in 2018. Its 2019 performance will continue to be leveraged by enhanced product portfolio, with existing and new customers realizing further operational improvements, and optimizing its brand and go-to-market capabilities.

Meanwhile, the company regularly divests the less profitable and underperforming businesses to focus on its core areas, in a bid to accelerate growth and improve shareholder value. The company is enthusiastic about the future prospect of expansion and margin growth.

Cost-cutting initiatives are boosting profits through business consolidations, system implementations, plant & branch closures, improvement in the global supply chain, and headcount reductions. Although the company has been experiencing depressed margins, it remains structured to optimize corporate demand for driving strong growth and margin expansion in the near future. Notably, in 2018, selling, general and administrative expenses were 17.7% of net revenues, contracting 90 basis points (bps) year over year.

Causes of Concern

In 2018, Masco’s adjusted gross and operating margins declined 200 bps and 60 bps, respectively, due to increased commodity costs, higher depreciation expense, and ERP and logistics costs. Raw material costs and expenses related to new product launches are hurting its margins and profits. Masco purchases several raw materials like resin, copper and zinc to manufacture its products. Fluctuations in the prices and availability of these raw materials might increase the cost of production.

Meanwhile, the company’s overall performance is directly affected by volatility in the housing market. Over the last few quarters, the housing market has been witnessing a slowdown due to the affordability concerns arising from higher housing prices and rising mortgage rate. The company believes that the above-mentioned headwinds are likely to hamper its performance going forward.

For full-year 2019, repair and remodel business (which represents approximately 85% of its business), is expected to grow in mid-single digits, lower than the 2018 level. Also, new construction is anticipated to rise in low-single digits, mainly due to labor constraints and affordability concerns prevailing in the market.

Moreover, in international markets, specifically in Europe, sales are likely to grow in low-single digits. Consequently, overall sales growth (excluding currency) is expected in the range of 3-5% (versus 9.4% improvement in the year-ago period).

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Arcosa, Inc. ACA, Armstrong World Industries, Inc. AWI and Fastenal Company FAST, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arcosa and Armstrong World’s earnings for the next year are expected to increase 28.7% and 12.6%, respectively.

Fastenal is expected to record 8% earnings growth in the current year.

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