Building products and installation maker Masco Corp. (MAS) reported a slight Q1 loss as US homebuilding activity remains sluggish although improved. The company reported a narrower loss of 2 cents per share versus the 23 cents the company lost last year, but failed to break even as analysts hoped to see. Sales were boosted by better volumes of plumbing products as well as windows, and the overall gains of 3% were actually better than expected. Looking ahead though, Masco believes there will be a modest recovery in remodeling and homebuilding, but consumers will remain leery of spending on big-ticket items. Furthermore, the company doubled their estimates for restructuring charges related to its cabinet business from $70 million to $140 million. For a company that had more than doubled in the last year (coming into earnings), investors were certainly disappointed by the quarterly results and shares sold off more than 12% on Tuesday afternoon.
On the same day as MAS quarterly earnings release the market got a fresh reading on the housing market through the Case-Shiller Home Price Index. Essentially the data shows that housing prices are just about even with this time
last year, which is clearly an improvement from the persistent declines the index has experienced since the beginning of 2007. Perhaps this should be seen as a reason to celebrate, as the worst of the housing market must be behind us now, right? Unfortunately, we are not so sure. The Fed has bought literally trillions of dollars of mortgages in order to facilitate lower mortgage rates and allow greater affordability, and home prices continued to fall. Now with the economy having stabilized, it is unlikely that much further support will be offered by the Fed going forward. Furthermore, the Homebuyer Tax Credit is set to elapse later this very week. We would not be surprised to see a lull in home buying shortly after the credit fades into the history books.
All of this is to say that the housing market still faces serious headwinds, and the glut of excess supply on the market should make homebuilders cautious going forward. Investors may want to temper their optimism when it comes to a company as tied to the US housing market as Masco (79% of fiscal 2009 sales from North America). A case can easily be made that the US housing market has shown improvement, but is the optimism overblown in a company like Masco that has more than quadrupled in price from the bottom. Remember, this company failed to turn a profit in the first quarter, and coming into the day was trading at 43x projected fiscal 2010 EPS.
At Ockham, we have believed Masco has been Overvalued since the second half of last year as the price clearly outpaced fundamental improvement, and we are reaffirming that stance this week. According to our methodology, we believe the stock would be more appropriately valued in the low teens given the current fundamentals and our expectations for a difficult housing environment unfolding for the second half of 2010.
