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Masco Strong on Acquisitions & Repair/Remodeling Activity

Zacks

Masco Corporation MAS has been expanding its portfolio with more acquisitions. In January, the company signed an agreement to take over Kichler Lighting. The acquisition will compliment Masco’s product line. The company is enthusiastic about the prospect of expansion into the fragmented $6-billion U.S. residential lighting industry.

Moreover, Masco acquired Mercury Plastics, Inc. in the fourth quarter of 2017. Mercury Plastics manufactures water handling systems for appliances and faucets as well as various other plumbing products. The company posted revenues of $45 million in 2017.

These acquisitions will prove accretive to Masco’s earnings in 2018 and are expected to create significant shareholder value.

Apart from acquisitions, Masco regularly divests less profitable and underperforming businesses to focus on its core areas and accelerate growth. In the fourth quarter of 2017, the company divested Moores Furniture Group, its small UK cabinet operation, which was no longer core to its long-term strategy. In the second quarter of 2017, Masco completed the divestiture of its Arrow Fastener business for $126 million.

Let’s take a look at other factors that have been working in favor of Masco.

Strong Repair/Remodel Activity

Increased demand for repair/remodel products have been an important revenue generator for Masco. Over 80% of Masco’s revenues are generated through repair/remodel activity. Strong demand for such products across all channels of distribution led to a 4% increase in North American sales in 2017. KraftMaid, the company’s leading repair and remodel brand, came up with a solid performance in retail and dealer channels and delivered mid single-digit growth on increased volumes in 2017.

Effective Cost-Saving Initiatives

The company’s cost-saving initiatives help in boosting profit level through business consolidations, system implementations, plant closures, branch closures, improvement in the global supply chain and headcount reductions. Masco’s gross margin expanded 80 basis points (bps) and operating margin increased 100 bps in 2017.

Bottom Line

Increasing demand for new home construction and repair as well as remodeling products bode well for Masco. Cost-saving initiatives, acquisitions & divestitures at regular intervals to accelerate growth are expected to drive profits. Meanwhile, Masco’s shares have gained 21.7% in the past year, outperforming the industry’s growth of 14.1%. Also, the trend in current-year earnings estimate revisions is satisfactory, as it moved 7.5% upward over the past 30 days, signaling analysts’ optimism surrounding the stock.


However, a significant portion of Masco’s sales comes from only two customers — Home Depot and Lowe's. Home Depot contributed to 33% of its consolidated net sales in 2017 and Lowe’s, the second largest buyer, generated less than 10% of net sales. Increased concentration toward these customers may not be a favorable mix, as Masco will be liable to lose its sales in case of adverse events.

Zacks Rank & Stocks to Consider

Masco carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same space are Advanced Drainage Systems, Inc. WMS, Armstrong World Industries, Inc. AWI and Gibraltar Industries, Inc. ROCK. All the stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..

Advanced Drainage Systems is likely to witness a 50% rise in earnings in fiscal 2018.

Armstrong World Industries is expected to witness 12.6% growth in earnings this year.

Gibraltar Industries is expected to witness 20.5% growth in current-year earnings.

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