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Will Margin-Related Woes Hurt Mohawk's (MHK) Earnings in Q2?

Zacks Equity Research

Mohawk Industries, Inc. MHK is scheduled to report second-quarter 2019 results on Jul 25. In the last reported quarter, the company’s adjusted earnings topped the Zacks Consensus Estimate by 2.9% but net sales missed the same by 1.8%.

However, the bottom line declined 29.2% year over year due to input cost inflation, a stronger dollar, softer market conditions in most of the regions served by the company and declining product mix. Also, uneven demand across the markets served added to the woes.

Nevertheless, Mohawk’s top line grew 1.3% year over year.

Which Way are Top and Bottom-Line Estimates Headed?

The Zacks Consensus Estimate for Mohawk’s second-quarter earnings is pegged at $2.87 per share, indicating a 18.2% decline from the prior-year reported figure of $3.51. The consensus estimate for net sales is pegged at $2.64 billion, suggesting a 2.5% increase from the year-ago reported figure.

Mohawk Industries, Inc. Price and EPS Surprise

Mohawk Industries, Inc. Price and EPS Surprise

Mohawk Industries, Inc. price-eps-surprise | Mohawk Industries, Inc. Quote

Let’s See How Things are Shaping Up for This Announcement

Difficult conditions in U.S. housing markets, continued weakness in Flooring North America, and uncertain macro trends in Europe and Australia have been impacting the demand for Mohawk’s products. The economies in Europe, Australia and New Zealand have been slowing, thereby creating pressure on its revenues and margins. Although the company believes that the situation will improve going forward, the above-mentioned headwinds are expected to affect sales in the second quarter.

Nonetheless, the company’s innovative products across its portfolio, price increases and improved manufacturing processes are likely to offset the headwinds to some extent. The continued growth of LVT owing to noteworthy innovations is expected to add to the positives.

Segment-wise, the Zacks Consensus Estimate for the company’s Flooring North America segment net sales is pegged at $1,048 million, indicating a decline of 0.9% from the year-ago reported level.

Additionally, unfavorable foreign currency translation is expected to affect the Flooring ROW business in the second quarter, as a significant portion of Mohawk’s business operates outside the United States. Although slowing economies in Europe, Australia and New Zealand are expected to hurt the segment’s performance, strategic acquisitions and product innovations are likely to offset the negatives. The Zacks Consensus Estimate for the segment’s sales is pegged at $626 million, suggesting a 6.1% improvement from the prior-year reported figure.

The consensus mark for sales from the company’s Global Ceramic segment is pegged at $957 million, implying 3% year-over-year growth.

Meanwhile, rising material costs have been denting its margins over the last few quarters. Again, labor, energy and fuel-related costs have been negatively impacting results. The company expects these costs to impact the bottom line in the to-be-reported quarter as well.

Overall, due to the above-mentioned headwinds, Mohawk expects second-quarter earnings (excluding one-time charges) in the range of $2.81-$2.91 per share, which is lower than the year-ago level of $3.51.

Here is What Our Quantitative Model Predicts:

Our proven model does not conclusively show that Mohawk is likely to beat 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 -0.7%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Mohawk currently carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 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 some companies in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Arcosa, Inc. ACA has an Earnings ESP of +15.22% and holds a Zacks Rank #2.

Rayonier Inc. RYN has an Earnings ESP of +19.15% and carries a Zacks Rank #3.

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +2.68% and a Zacks Rank #1.

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