MASCO CORP. $38(New York symbol MAS; Manufacturing & Industry sector; Shares outstanding: 293.5 million; Market cap: $11.2 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.masco.com) is a leading manufacturer and distributor of home improvement and building products. Based in Michigan, its brands include Behr (paint), Delta (faucets), KraftMaid (cabinets), and Milgard (windows and doors).
North America accounts for 81% of its sales, followed by Europe (11%); the U.K. (4%); China (2%) and other countries (2%).
Masco recently announced that it would explore strategic alternatives for both its cabinetry and window businesses (about 20% of its sales). Although those businesses are leaders in their respective markets, Masco feels it can generate greater value for shareholders by exploring all possible options. That likely includes spinning them off or selling them. It should complete the review by early summer.
Meantime, the company’s overall sales fell 16.2%, from $8.52 billion in 2014 to $7.14 billion in 2015. That’s because it spun off its insulation installation business as TopBuild Corp. (New York symbol BLD). Masco’s sales then rose 3.0% to $7.36 billion in 2016, and improved steadily to $8.36 billion in 2018.
If you exclude costs related to the TopBuild spinoff and other unusual items, overall earnings jumped 115.0%, from $360.0 million in 2014 to $774.0 million in 2018. Due to fewer shares outstanding, per-share earnings improved at a faster rate of 145.1%, from $1.02 to $2.50.
In the three months ended March 31, 2019, Masco’s revenue decreased 0.6%, to $1.91 billion from $1.92 billion a year earlier. The decline was the result of slower sales of plumbing, decorative architectural products and windows. That weaker performance was partially offset by higher sales of cabinetry products.
Total earnings fell 9.2%, to $129 million from $142 million. Masco spent $116 million on share repurchases in the quarter. As a result, earnings per share declined just 2.2%, to $0.44 from $0.45.
On March 31, the company held $316 million cash. Long-term debt of $2.8 billion was just 25% of its market cap.
Selling or spinning off the cabinetry and windows divisions should improve Masco’s profitability. The company expects those businesses will likely have lower profit margins in 2019 (cabinetry, 9.1%; windows, 5.2%), compared to its remaining divisions (about 18.0%).
Masco faces several near-term challenges, including higher costs for raw materials and transportation. It also expects higher U.S. tariffs on products imported from China to add $150 million to its 2019 costs. However, its competitors face the same constraints, and as an industry they should be able to raise prices.
The company will probably earn $2.67 a share in 2019, and the stock trades at 14.2 times that forecast. It raised its quarterly dividend by 14.3% with the November 2018 payment, to $0.12 a share from $0.105. The new annual rate of $0.48 yields 1.3%.
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