On Oct 13, we issued an updated research report on Masco Corporation (MAS).
Masco enjoys strong fundamentals including a strong brand portfolio, continued focus on product innovation and cost improvements. Further, Masco boasts partnership with some of the biggest companies. In the direct-to-builder channel, it serves large homebuilders like PulteGroup, Inc. (PHM), Lennar Corporation (LEN) and D.R. Horton, Inc. (DHI). In the retail channel, it has partnerships with big-box retailers like Home Depot and Lowe’s. Masco is the largest supplier of non-commodity products to Home Depot and kitchen and bath aisle to Lowe's.
In early Oct, Masco announced some transformative actions which included a tax-free spin-off of its Installation and Other Services segment into a separate company. The maker of home improvement products also plans to buy back shares and reduce its workforce.
We believe the decision to spin off the installation business will reduce the cyclicality of Masco’s portfolio since a significant portion of demand for this segment’s products and services is tied to new home construction. Most importantly, the move will simplify Masco’s product portfolio, allowing it to focus more on the steadily improving home repair and remodeling market.
Currently, around 70% of Masco’s top line is generated by repair/remodel activity and the remaining 30% comes from new home construction. With housing starts recovering at a slow pace since the second half of 2013, Masco’s growth in the last 12 months has mostly been driven by the steadily growing repair and remodel activity, mainly in the plumbing and paint businesses. Lower ticket repair remodel activity is expected to continue to improve at a steady rate, going forward.
However, bigger ticket repairs continue to lag, mainly in cabinets. In fact, while most divisions are doing well, the cabinet business continues to under perform, recording sales and margin decline in the second quarter. Masco’s cabinet segment generated an operating loss from 2009 through 2012. Though the business improved in 2013, it remained weak in the first half of 2014 due to slowdown in housing construction and lack of bigger-ticket repair activity.
Moreover, the cabinet segment is expected to remain soft in the upcoming quarters, as consumers continue to defer big ticket repair expenses. In fact, the company expects to post a modest loss in the segment in 2014 due to lower demand and ERP-related disruptions.
Moreover, with the U.S. residential activity growth slowing down in the second half of 2013 as well as the first half of 2014, demand for Masco’s home improvement products has been hurt.
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