Analysts' Choice: Floor Supplier Has High Ceiling

11/14/2016


  Recent Price
$198
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
75
  Long-Term Debt As % Of Capital
18%
  52-Week Price Range
$216.58 - $148.56

In the weeks leading up to Mohawk Industries' ($198; MHK) September-quarter report, investors braced for the worst. Shares of Mohawk, a maker of flooring products, had slumped since the end of September as a litany of building suppliers posted disappointing results and cut guidance.

Not helping matters, Mohawk entered the reporting season with a spotty record for managing analyst sales expectations, having topped the consensus in just three of the prior 10 quarters.

On virtually all accounts, the company surpassed expectations. Mohawk earned $3.50 per share excluding one-time charges, up 17% and $0.04 above the consensus. Sales climbed 7% to $2.29 billion, narrowly ahead of the consensus. For the December quarter, management expects per-share profits of $3.16 to $3.25, implying 12% to 15% growth. The consensus stood at $3.16 per share at the time of the announcement.

The stock has surged 12% since Mohawk's quarterly report and now trades roughly in line with medians for the S&P 1500 consumer-discretionary sector and home-furnishings industry. But the shares still look unusually cheap versus their own history. At 16 times trailing earnings, the stock trades 18% below its three-year average P/E ratio.

Mohawk is a Focus List Buy and a Long-Term Buy.

Business breakdown

Mohawk manufactures carpet, rugs, ceramic tile, stone, and hardwood flooring. Management estimates the North American flooring industry is expanding 3% to 4% this year and anticipates similar growth in 2017.

Mohawk's recent operating momentum extends across all three of its segments. The international flooring unit (21% of sales and 26% of operating income for the nine months ended September) has helped drive growth in 2016, with operating income surging 71% on 39% higher revenue. North American flooring (43%, 36%) increased operating profit 150% on a 6% sales increase, while the global ceramics business (36%, 38%) posted 15% higher operating profits and 5% higher sales.

All three segments fattened their operating profit margins last quarter, as productivity gains and higher utilization overcame a weaker product
mix and modest inflation in raw-materials prices. Management sees opportunities to pry margins wider in 2017, especially for its ceramics business. To help counter higher costs, Mohawk also plans to raise prices on carpeting in North America 3% to 5% in January.

Most of the company's factories are running at or near capacity, including several new facilities. The company projects capital spending will rise nearly 30% to a record $650 million in 2016, likely increasing further next year. The bulk of the capital investments are going toward capacity expansion, followed by productivity improvements and maintenance. With its leverage at historically low levels, Mohawk will also consider pursuing multiple acquisitions at the same time to broaden its product portfolio and geographic footprint.

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
Sep '16
3.50
vs.
2.98
7%
216.58
-
183.90
19 - 16
Jun '16
3.47
vs.
2.69
13%
201.78
-
177.34
19 - 16
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
           
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
93
94
77
94
71
51
17

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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