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What's in the Cards for Masco (MAS) This Earnings Season?

Zacks Equity Research

Masco Corporation MAS is slated to report fourth-quarter 2018 results on Feb 7, before the opening bell.

In the last reported quarter, the company’s top and bottom lines missed the Zacks Consensus Estimate by 3.1% and 7.1%, respectively. In fact, its earnings missed the consensus mark in four of the trailing five quarters, recording average negative surprise of 4%. Softness in DIY paint and international markets, along with commodity and logistics cost pressures resulted in lower earnings and revenues.

Nevertheless, total sales increased 8% and adjusted earnings gew 25% on a year-over-year basis. The positive performance was backed by strong sales from North American Plumbing and Cabinetry Products.

Masco Corporation Price and EPS Surprise

Masco Corporation Price and EPS Surprise | Masco Corporation Quote

How are Estimates Faring?

For the quarter to be reported, the Zacks Consensus Estimate for earnings has trended downward from 57 cents to 56 cents over the past 30 days. Nonetheless, this reflects a gain of 27.3% from 44 cents reported in the year-ago quarter. Revenues are expected to be $2.01 billion, up 7.1% year over year.

Factors That Might Influence Upcoming Quarterly Results

Masco’s strength in repair and remodeling products, portfolio expansion and cost-saving initiatives are likely to aid its performance in the to-be-reported quarter.

The company has been experiencing strong demand for its industry-leading repair and remodeling products across all channels of distribution, and price points. Notably, Masco’s repair and model business has been a key growth driver, contributing 84% to sales. The business has been performing well of late, given underlying housing fundamentals.

Markedly, Masco continues to expand its portfolio via acquisitions. The company completed the acquisition of Kichler Lighting on Mar 9, 2018. It aims to expand in the fragmented $6-billion U.S. residential lighting industry. Notably, the said acquisition added $239 million to its total net sales in the first nine months of 2018 and is likely to add more value in the upcoming quarters.

Masco’s cost-saving initiatives bode well for the company’s earnings performance. These initiatives target company-wide annual savings through reduction of corporate expense and simplification of Masco’s organizational structure. Importantly, its selling, general and administrative expenses, as a percentage of revenues, improved more than 50 basis points (bps) in the first nine months of 2018.

Higher Costs a Woe

Masco’s adjusted gross and operating margins contracted 110 bps and 70 bps, respectively, in the third quarter of 2018. Gross margins were mainly affected by the acquisition of Kichler. Strategic growth investments, ERP costs, a lag in price/cost, along with inefficient Windows segment led to the decline. The company is experiencing cost pressure, given higher raw materials for paint, which are likely to have an impact on the rest of 2018.

Segment Performance

The company’s Plumbing Products, which comprise 47.9% of the total revenues, are expected to contribute substantially to overall growth. The Zacks Consensus Estimate for Plumbing Products revenues of $1,007 million reflects growth from $958 million in the year-ago period but a decline from $1,013 million in the third quarter.

The Cabinets segment (contributing 13.2% to total sales) is expected to decrease 1.3% year over year and 0.4% sequentially to $235 million.

Decorative Architectural Products are expected to grow 28.4% year over year but decrease 16.9% sequentially in the to-be-reported quarter.

Revenues at Windows and Other Specialty Products are expected to inch up 2.1% year over year but decline 7.3% sequentially. The segment continues to experience market softness in U.K. Also, lower volume across the board added to the woes.

Quantitative Model Prediction

Our proven model does not show that Masco is likely to beat earnings estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -1.20%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Masco currently carries a Zacks Rank #4 (Sell).

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks Worth a Look

Here are a few construction stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release:

Taylor Morrison Home Corporation TMHC has an Earnings ESP of +25.00% and a Zacks Rank #3.

Winnebago Industries, Inc. WGO has an Earnings ESP of +12.92% and a Zacks Rank #2.

Toll Brothers Inc. TOL has an Earnings ESP of +1.91% and holds a Zacks Rank #3.

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