We upgrade our recommendation on Masco Corporation (MAS) to Neutral from Underperform. Headquartered in Taylor, Michigan, Masco manufactures, sells and installs home improvement and building products. Approximately 75%-80% of the company’s sales are generated from operations in North America, primarily in the U.S. International operations are located principally in Belgium, China, Denmark, Germany, the Netherlands and the U.K.
The company released its third quarter earnings on October 24, 2011. Adjusted earnings of 8 cents per share (excluding special items) was lower than the year-ago quarter earnings of 11 cents per share (excluding special items). Net sales increased only 3% year over year to $2.01 billion.
Masco’s adjusted gross profit declined to $503 million (25.1% of sales) from $526 million (26.9% of sales) in the third quarter of 2010. Similarly, adjusted operating profit dropped to $123 million (6.1% of sales) from $141 million (7.2% of sales) in the prior-year period. The continuous decline in the construction of new homes was primarily responsible for the company’s poor performance in the quarter.
Rising prices of raw materials are also impacting the company’s margins. Most of Masco’s products are made with the use of particle board, copper, brass, titanium dioxide and resins. Prices of each of these materials have shown upward rising trends in the recent times.
Intense competition is another threat. The company’s competitors include The Sherwin-Williams Company (SHW), The Valspar Corporation (VAL), PPG Industries (PPG), Rust-Oleum Corporation (Zinsser brand) and Benjamin Moore & Co.
However, certain company-specific efforts are expected to have favorable impacts going further. Management is continuously restructuring and rationalizing the company’s businesses with the implementation of the MBS in order to cope with the challenging industry conditions, namely the weak U.S. homebuilding industry and the raw material cost inflation.
Moreover, Masco combined its Builder Cabinet Group and Retail Cabinet Group to form Cabinetry aimed at strengthening its distribution channels. It also entered into strategic partnership with Owens Corning to boost sales of Masco Contractor Services.
Considering all these, the shares of Masco are maintaining a Zacks #3 Rank, reflecting a Hold rating over the short term.
