Masco Up 17% Over a Month: Will R&R Activity Aid Further?

Masco Corporation MAS has been gaining strength from solid repair and remodel or R&R activity, inorganic efforts, as well as cost-saving initiatives. The company’s shares have improved 31.1% in the past year compared with the Zacks Building Products – Miscellaneous industry’s growth of 3.1%. Also, it has outperformed the S&P 500’s 11.1% rise in the said period. Precisely, shares of Masco have returned 17.2% over a month, steadily outperforming the industry’s 13.4% rally.

However, COVID-19-induced economic slowdown and anticipated softness in businesses in the near term are pressing concerns for Masco, which shares space with Armstrong World Industries, Inc. AWI, Louisiana-Pacific Corporation LPX and Owens Corning Inc OC in the same industry.

Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Drivers

Transformed Portfolio: Over the years, Masco has remained focused on realigning its portfolio toward lower-ticket, less-cyclical, repair and remodel-oriented products. Strong position in DIY oriented products positions Masco particularly well to overcome this coronavirus-related uncertainty. Moreover, it is expected to outperform the market once the effects of the pandemic gradually phase out.

DIY-focused products like paint have already been performing well. Masco’s first-quarter 2020 earnings and revenues handily beat the Zacks Consensus Estimate and improved year over year, courtesy of strong contributions of North American plumbing products, as well as paint and other coatings products.

Meanwhile, solid repair and remodel activity is expected to drive demand. Notably, the repair and remodeling industry now represents approximately 90% of its business. Masco noted that lower ticket repair and remodel products performed well amid market downturn.

Acquisitions & Divestitures: Masco continues to expand its portfolio via acquisitions. In the first-quarter 2020, Masco acquired the entire share capital of SmarTap A.Y Ltd. ("SmarTap"), a developer of a smart bathing system that monitors and controls the temperature and flow of water. SmarTap, which has been added in the Plumbing Products segment, provides an adaptable solution for a wide range of products as it is compatible with all showerheads, hand showers, spouts and shower jets.

Masco regularly divests less profitable and underperforming businesses to focus on core areas for accelerating growth and improving shareholder value. The company completed the sale of the Cabinetry business unit in first-quarter 2020, in line with the portfolio transformation strategy that it announced a year ago. In March 2019, Masco undertook "strategic alternatives" for cabinetry and window businesses.

We view these endeavors as tailwinds for the company as these will remove cyclicality and lower-margin businesses. This move will also drive liquidity, thereby helping the company to strengthen the product portfolio and boost better-performing businesses.

Headwinds

Coronavirus-Related Woes: Limits on the number of customers and big box retail store restrictions on the sale of certain categories in various states, as well as closure of distribution outlets will reduce sales of Masco’s products in the second quarter. Given uncertainty, it expects second-quarter sales to be down 20-25% year over year and decremental EBIT margins in the range of 40-45%, given abrupt shutdowns and inefficiencies of plants due to safety precautions.

Plumbing sales are expected to decline 30-35%, ex-FX, in the second quarter. Masco's spa business has had a more significant negative impact than other businesses due to forced closure of plants in California and Mexico. The company expects $100-million impact, or one-third of the total segment drawdown, on second-quarter sales.

For the Decorative Architectural Products segment, Masco expects second-quarter sales to be down 5-10% year over year. Second-quarter lighting sales will also be negatively impacted by approximately $15 million due to loss of a portion of a private label program in inventory rebalancing at a customer.

Lower International Sales: Masco’s sales are being impacted by softness in certain international markets. The company’s international sales decreased 3% in first-quarter 2020 due to lower volumes, partially offset by pricing actions. Notably, Masco’s 2019 international sales remained flat year over year.

Additionally, the company’s international business is being impacted by shelter-in-place orders in many European countries, including the shutdown of U.K. operations. In April, Masco saw high double-digit sales declines in the U.K., Italy and France, and approximately 20% decline in Germany, its largest market.

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LouisianaPacific Corporation (LPX) : Free Stock Analysis Report
 
Masco Corporation (MAS) : Free Stock Analysis Report
 
Owens Corning Inc (OC) : Free Stock Analysis Report
 
Armstrong World Industries, Inc. (AWI) : Free Stock Analysis Report
 
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