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Masco (MAS) Down 8.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Masco (MAS). Shares have lost about 8.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Masco due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Masco's (MAS) Q2 Earnings Beat Estimates, View Soft

Masco Corporation reported mixed second-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Also, on a year-over-year basis, the company’s bottom line improved owing to significant pricing actions and cost-control measures. However, its top line slipped marginally from the prior-year quarter due to lower volumes across the board.

Notably, the board announced its intention to raise annual dividend by 13% to 54 cents per share in the beginning of the fourth quarter.

Inside the Headlines

Masco’s adjusted earnings came in at 88 cents per share, beating the consensus mark of 81 cents by 8.6%. Also, the reported figure increased 15.8% from 76 cents in the year-ago quarter.
Total net sales of $2,275 million missed the consensus estimate of $2,339 million by 2.7% and declined nearly 1% from the prior-year figure of 2,297 million.

North American sales (in local currency) grew 1% from the prior-year period but declined 4% internationally.

Margins Performance

Gross margin during the reported quarter increased 170 basis points (bps) to 34.4%. Adjusted gross margin of 34.5% also improved 90 bps from 33.6% recorded in the prior year.

Selling, general and administrative expenses — as a percentage of net sales — came in at 17.1%, in line with the prior-year period. However, adjusted selling, general and administrative expenses contracted 20 bps to 16.9%.

Adjusted operating profit increased 5% from the prior-year quarter to $399 million. In addition, adjusted operating margin totaled 17.5%, up 100 bps. Adjusted EBITDA also grew 5.3% year over year to $441 million.

Segmental Analysis

Plumbing Products: Sales in the segment slipped 2% year over year to $1,012 million in the quarter. Excluding the impact of foreign currency translation, sales remained flat year over year. The tepid performance was due to lower volume and currency headwinds, partially offset by pricing actions.

Adjusted operating margin in the segment improved 80 bps from the year-ago period to 19.6%. Adjusted EBITDA also grew 2.8% year over year to $220 million.

Decorative Architectural Products: The segment reported sales of $827 million, up 3% from the prior-year period. The upside was mainly attributable to growth in paints and other coating products.

Adjusted operating margin jumped 40 bps to 20.9%. Adjusted EBITDA also increased 4.6% from the prior-year period to $183 million.

Cabinets and Related Products: The segment’s sales during the quarter totaled $251 million, down 6% year over year, primarily owing to lower volume that was partially offset by strong pricing.

Nonetheless, adjusted operating margin rose 120 bps to 13.5%. Also, adjusted EBITDA inched up to $38 million from the prior-year figure of $37 million.

Windows and Other Specialty Products: Net sales in the segment amounted to $185 million, reflecting a fall of 3% year over year. Reduced volume across the segment was partially offset by favorable mix in North America and price increase.

Adjusted operating margin increased 120 bps to 5.9% in the quarter. Adjusted EBITDA improved 23.1% from the year-ago quarter to $16 million.

Financials

As of Jun 30, 2019, the company had cash and cash investments of $325 million, lower than $559 million recorded at the end of 2018. Net cash from operating activities was $213 million in the first six months of 2019 compared with $293 million in the comparable year-ago period.

The company repurchased 4.3 million shares during the quarter through its repurchase program.

2019 View Narrowed

Masco has tightened the lower end of its 2019 EPS guided range to $2.62-$2.72 (previously $2.60-$2.80).

Segment-wise: Plumbing revenues are now expected to grow between 1% and 3% (versus 3-5% previously expected), assuming flat year-over-year operating margins. Reduced expectation was due to lower volumes in the first half of 2019, manly in the International Plumbing business.

Decorative Architectural Products sales are now expected to grow 1-3% (versus previous expectation of lower end of the 4-6% range). The reduced expectation is mainly due to lower volumes resulting from the impact of disciplined pricing actions in the lighting and builders hardware business. Operating margins are maintained within 17-18%.

For Cabinets, Masco continues to expect sales growth between 0% and 3%. Segmental margins are expected to witness modest expansion from 2018 levels, given its cost-control efforts in the first half of 2019.

For Windows, it now expects sales growth to fall 1-3% — excluding currency — due to the performance of the U.K. Windows business. However, it continues to expect modest margin improvement for the full year. Earlier, Masco had expected sales growth from this segment in the 1-3% range (excluding currency), with modest margin improvement.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Masco has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. Notably, Masco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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