Analysts' Choice: Mohawk Should Floor The Experts

6/27/2016


  Recent Price
$195
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
18
  Shares (millions)
74
  Long-Term Debt As % Of Capital
18%
  52-Week Price Range
$212.16 - $148.56

Mohawk Industries ($195; MHK) holds a leading 23% share of the U.S. flooring market. Housing starts jumped 10% in the first five months of 2016, and solid consumer sentiment should support continued spending on home renovations.

An April survey found that half of U.S. homeowners plan remodeling projects this year, with flooring the second-most-popular job. The residential market accounts for 80% of Mohawk's sales, with commercial 20%.

In the last 12 months, Mohawk delivered sales of $8.36 billion, up 6%, and cash from operations of $1.10 billion, up 61% — both record highs. Over the past year, free cash flow has quadrupled to $561 million, Mohawk's highest level since 2009. Return on equity is also marching higher, and currently stands at levels last seen in 2007. Mohawk, already a Buy and a Long-Term Buy, is joining the Focus List.

Out on the tiles

Soft-surface products (carpet, rugs, and vinyl tile) accounted for 38% of Mohawk's revenue in 2015, while hard tile (ceramic, porcelain, and natural stone) brought in another 38%. Soft-surface products, with sales up 11% last year, have driven recent growth. Laminate and wood products (hardwood and laminate flooring, insulation boards, and roofing materials) represented the remaining 24% of sales. Mohawk holds patents for interlocking laminate floors that will expire in June 2017, potentially reducing licensing profits to $30 million from about $130 million last year, or $9% of Mohawk's operating profit.

Lower costs for raw materials have put pressure on Mohawk's selling prices, but operating profit margins rose in the March quarter, building on gains in each of the past four years. Mohawk attributes its improved profitability to higher volumes and productivity gains, as well as the lower input costs. Management expects profit margins to keep rising this year.

Mohawk draws on North America for nearly 75% of revenue, with the remainder mostly from Western Europe, Mexico, and Russia.

Since 1992, the company has completed 34 acquisitions to expand its flooring business. Last year Mohawk spent about $1.5 billion on four takeovers, including an eastern European manufacturer of ceramic tile and IVC Group, a maker of luxury vinyl tile. Designed to resemble pricier hardwood or stone, luxury vinyl tile is one of the fastest-growing segments of the flooring industry. Mohawk is also ramping capital expenditures to boost capacity that should support up to $1.4 billion in additional sales.

Conclusion

The flooring expert has a high ceiling for future growth. The U.S. flooring industry's sales remain nearly 30% off its 2005 high, suggesting pent-up demand can fuel future growth. For the June quarter, Mohawk expects earnings per share of $3.29 to $3.38, up 22% to 26%. Analyst estimates are rising, with the consensus projecting earnings of $3.36 on 15% revenue growth. The stock trades at 18 times estimated 2016 earnings, 2% below the industry median.

An annual report for Mohawk Industries Inc. is available at 160 S. Industrial Blvd., Calhoun, GA 30701; (706) 629-7721; www.mohawkind.com.

MOHAWK INDUSTRIES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
2.38
vs.
1.70
15%
193.59
-
148.56
19 - 15
Dec '15
2.82
vs.
2.27
2%
201.88
-
180.00
21 - 19
Sep '15
2.98
vs.
2.44
8%
212.16
-
174.49
23 - 19
Jun '15
2.69
vs.
2.21
0%
195.30
-
172.97
23 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
8.07
10.20
0.00
212.16
-
151.15
21 - 15
2014
7.80
8.15
0.00
158.58
-
120.37
19 - 15
2013
7.35
6.55
0.00
149.01
-
91.30
23 - 14
2012
5.79
3.78
0.00
93.95
-
57.62
25 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
93
65
95
66
88
39

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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