Analysts' Choice: Flooring Leader Has Sky-High Potential

5/15/2017


  Recent Price
$234
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
18
  Shares (millions)
75
  Long-Term Debt as % of Capital
16%
  52-Week Price Range
$241-02 - $175.52

Mohawk Industries ($234; MHK) appears to be firing on all cylinders. The company delivered a solid March-quarter report, and its future looks bright given the robust U.S. housing market, strong demand for home renovations, and improving economies overseas. The stock scores above 60 for all six Quadrix categories, contributing to an Overall rank of 94. 

Founded in 1902 and taken public 90 years later, Mohawk produces ceramic tile, carpet, vinyl tile, and wood flooring. It claims to be the largest flooring company in the world, with operations in 10 countries and exports reaching 160 additional countries. The U.S. accounts for 65% of sales. Mohawk is a Focus List Buy and a Long-Term Buy.

Chasing inflation

In the March quarter, Mohawk grew per-share profits 14% to $2.72, matching the consensus estimate. Revenue crept 2% higher to $2.22 billion, narrowly missing the consensus of $2.27 billion. Management said inflation was unexpectedly strong last quarter, affecting, wood, polyurethane, energy, and labor costs. Yet Mohawk's operating profit margin expanded for the 21st consecutive quarter, as productivity gains, higher volumes, and improved product mix overcame the higher costs.

Mohawk plans to raise prices across its product lines by June, which should help the company fully recoup higher raw-material costs in the September quarter. Management continues to expect profit margins to rise slightly for the year.

Without the benefit of a full quarter of higher prices to offset inflation, Mohawk's guidance for the June quarter came up light. Management targets per-share profits of $3.53 to $3.62, versus the consensus of $3.74 at the time of the report. The company expects sales growth to accelerate in the current quarter, seemingly consistent with analyst expectations of 6% growth.

Encouragingly, customers' purchasing patterns in the ceramics unit have returned to normal, following an inventory correction that depressed March-quarter sales. Mohawk could also see upside to its guidance if customers ramp purchases ahead of the price hikes, an anomaly roofing company Owens Corning ($62; OC) experienced last quarter.

Analyst estimates for the September quarter and 2017 are rising — and seem likely to climb further. Management said four deals, totaling $270 million and expected to close in the June quarter, should boost 2017 per-share profits by $0.15. In the days since Mohawk's report, the full-year consensus profit estimate has risen by a penny. Mohawk also reiterated that 2017 organic sales growth should mirror last year's rate of 5.5% at constant currency.

The shares, up 17% in 2017, have raced ahead of the 7% gain for the S&P 1500 Index and the 11% surge by the consumer-discretionary sector. At 18 times trailing earnings and 16 times estimated 2018 profits, the stock trades roughly in line with its sector. But its trailing P/E ratio looks cheap relative to its five-year average of 22.

An annual report for Mohawk Industries, Inc. can be obtained 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 '17
2.72
vs.
2.38
2%
233.70
-
199.90
19 - 16
Dec '16
3.26
vs.
2.82
9%
205.91
-
175.52
17 - 14
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
8.96
12.61
0.00
216.58
-
148.56
17 - 12
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
71
73
95
70
75
64

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


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