On Sep 18, we maintained a Neutral recommendation on Masco Corporation (MAS) despite solid second-quarter 2013 results as we await substantial improvement in big ticket remodeling and the Cabinet segment.
Why the Neutral Recommendation?
Masco’s second-quarter 2013 (results announced on Jul 29) adjusted earnings of 23 cents per share surpassed the Zacks Consensus Estimate of 19 cents by 21.1%. Earnings improved 109.1% year over year driven by new products, strong performance in North America, solid margin expansion, the company’s turnaround efforts and profit improvement initiatives.
Masco’s net sales also surpassed the Zacks Consensus Estimate by 2.4%. Revenues rose 10.5% year over year driven by strong volume growth. Volumes benefited from new product and program launches and increase in new home construction activity in the U.S. Revenue growth was supported by robust top-line increase in all the segments. Consolidated margins also improved in the quarter driven by cost controls and better operating leverage. Most encouragingly, both Installation and Cabinetry segments returned to profitability in the quarter after underperforming in 2012.
Estimates were mostly revised upwards following the solid second-quarter results. The Zacks Consensus Estimate for 2013 was increased by around 10% while that for 2014 moved up approximately 9% over the past 60 days.
Overall, we have faith in Masco’s long-term fundamentals and are encouraged by its continued focus on product innovation and cost improvements. The company is also divesting its less-profitable and underperforming assets to focus more on its core areas.
However, the housing downturn and overall economic recession in the past 4–5 years significantly hurt consumer spending on home improvement, especially large kitchen and bathroom remodeling. Though some improving trends are being seen in repair/remodeling spending, we prefer to wait until we see a substantial resumption in spending for home improvements, especially for large-projects.
Moreover, Masco’s Cabinet business has been soft for some time mainly because of the slowdown in consumer spending for big ticket remodeling. The Eurozone crisis also remains a persistent overhang. Though improving trends have been noticed, we await more substantial improvement in the cabinetry business and in Europe.
Other Stocks to Consider
Masco carries a Zacks Rank #2 (Buy). Other stocks in the building/construction industry that are currently doing well include CaesarStone Sdot-Yam Ltd. (CSTE), PGT, Inc. (PGTI) and Drew Industries Inc. (DW). While CSTE carries a Zacks Rank #1 (Strong Buy), DW and PGTI carry a Zacks Rank #2 (Buy).
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